Here are the top five mistakes investors make which lead to risky purchases - and how you can avoid them.
Blogger: Jason Paetow, director, AllianceCorp
It is not uncommon to hear people talk about any form of investment, with the word ‘risk’ closely following. As property investors, we want to mitigate this risk so we can continually grow and build a multi-property portfolio, safely. So what are some mistakes investors make which lead to risky purchases and how can you avoid them?
Not having a plan
If you don’t have a strategy when you enter the world of property investment, you likely won’t know what kind of property to buy when, and it leaves you open to making hasty and poorly formed choices. If you have a strategy and know what you want to achieve financially, and know what kind of property you need to buy in order to get there, and the plan will open doorways to ongoing growth. This leaves you in a better position financially and emotionally, as you won’t be worrying about whether your property is performing or not.
Making an emotionally charged purchase
This ties into the previous point, but the problem is that property – unlike other investments such as shares – is actually something that we can get emotionally attached to. When you’re looking at a house, you need to be looking at it as a vehicle for creating wealth, and not as a home. Sure, someone is going to be living in it, but it’s not going to be you, so you need to choose a property based on how rentable it’s going to be, and not on how much you like it for yourself. Don’t let yourself be put off a potential purchase by something small. If you don’t like the backyard because it has pavers and you wouldn’t have it in your home, that’s fine, but chances are someone else is going to be fine with pavers and might actually prefer it!
Waiting too long
You can procrastinate in lots of different ways, but the bottom line is, if you’re armed with a strategy, you have a deposit and you’ve got an experienced investor to mentor and guide you, then you should be able to overcome any fears and invest. If you’re holding out for the ‘perfect property’ then guess what? It doesn’t exist. Same with focusing on the potential negatives - this is just going to lead to fear and doubts which aren’t going to help you become an investor!
Investing In Your Own Backyard
This is one that a lot of people fall into the trap of doing. Many first time investors will think that because they know an area well they should buy all their investment properties in it. This is a problem for a few reasons:
• Buying in the one area opens you up to risk due to market fluctuations. If you have all your eggs in the one basket (or all of your properties in Adelaide, for example) and the market slumps, all of your properties will slump together. If, however, you have properties in Adelaide, Brisbane and Sydney, you’ll be experiencing an upswing in Brisbane while Sydney peaks, and your property in Adelaide won’t seem so bad by comparison. It helps you to weather the natural ups and downs of the property market.
• Affordability may be an issue in your local area, so you might need to look further afield.
• Emotional buying may be a problem if you buy in an area that you live in or know very well that is local. You need to view property investment as just another business decision.
Using a Poor Strategy
You can fall upon a number of different issues here related to strategy, bearing in mind that a good strategy is key to dictating what kind of property you need to buy and where you need to buy it:
• Mistake One: Evaluating a property by the actual price, and not by the value of the property to you. As you invest more and become more used to looking at valuations and interpreting what the banks are telling you, you’ll start to see which properties are going to give you the greatest value in terms of growth and overall returns over time.
• Mistake Two: Buying based on rental yield alone. Before you can say that a property is cash flow positive, you really need to know how much the property will cost to maintain on a weekly basis and then compare the rent to that. Rental yield alone is not enough to say that a property is cash flow positive.
• Mistake Three: Using a poor financial plan to structure your finances. You need to ensure you can continue to borrow again and again in order to be able to build a property portfolio. Many people get stuck at one or two investment properties because they did not structure their finances correctly in the first instance.