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At the start of the new financial year, a large number of new property investors will be entering the property market across Australia, but many of them will never proceed beyond their first investment property because they make simple financial mistakes
Blogger: Paul Bennion, DEPPRO tax depreciation specialists
The harsh financial reality is that the many of these new property investors will never proceed beyond buying their first investment property because they make simple financial mistakes that limit their ability to purchase additional properties.
Generally, the very first property which an investor purchases will very often determine their future success in building a successful property portfolio and that is why it is important to carefully undertake as much research as possible before investing in real estate.
DEPPRO finds that some of the most common mistakes first time investors make when buying their investment property include:
* Purchasing the property with a principal and interest loan similar to purchasing an owner occupier home. The interest component of the loan is the only part of a home loan that is deductible for tax purposes and the amount of money you spend on paying off the principal limits your cash flow to purchase additional properties. That is why investors prefer interest only loans.
* Not undertaking a tax depreciation report at the time of settlement. If you don’t have a tax depreciation report completed at the time of settlement then you may not be able to claim the generous tax depreciation benefits that you are entitled to. These can equate to some 60% of the purchase price of the property and this cash flow can assist the investor to purchase more properties. It is therefore important that you obtain the services of a professional tax depreciation company to complete a tax depreciation schedule as soon the property is purchased.
* Buying an older property which can drain your finances through maintenance costs. New properties may come with a builders warranty and they also allow investors to claim the maximum tax depreciation benefits compared to older properties which have less attractive depreciation benefits.
* Not undertaking a full assessment of the true cost of buying and holding the property. For example, if the property an apartment, there are additional cost issues compared to buying a stand-alone house such as strata fees. Very high strata fees can eat into your cash flow which can limit your ability to buy more properties.
* Buying a property in a location which is not attractive to tenants i.e. not close to amenities such as shops or transport. These types of properties will generally have higher vacancy rates and lower rents which again limits the cash flow of the property investor.
* Purchasing a property in an area where there is an oversupply of properties meaning rents will be low and capital growth rates limited. Without capital growth, the investor will not have enough future equity in their property to use as security to purchase a second and third investment property.
* Trying to select the tenant yourself rather than using the services of a number of reliable property management companies. Bad tenants will not pay their rent and damage the property. After experiencing a bad tenant, many first time investors often sell their first investment property because of the financial losses incurred.
* Buying an investment property with the view to a quick return rather than viewing it as a long term investment and stepping ladder to purchasing a portfolio of properties that will fund their retirement. At this time of year, properties are promoted to first time investors that can be overvalued and have artificial rental return built into the purchase price which cannot be sustained over the long term.