Blogger: Daniel McQuillan, executive director, Investwise
The start of a new financial year traditionally sees a surge in activity by property investors.
In particular, it is the time when many people decide to buy an investment property for the first time.
If you plan to invest in property, you need to have a strategy in place whereby you can purchase several properties over a period of time, which will collectively create wealth over the long term.
The reality is that most investors give up after buying only one investment property, having failed to put in place a long-term plan, or to get professional assistance in creating a plan in place best suited to their personal circumstances and backed up with sound research.
Over the years I have met many first-time investors who have stumbled at the start, but after receiving sound advice they have gone on to build highly successful property portfolios.
After speaking to many of these first-time investors, I have identified below some of their most common mistakes, which could have proved fatal until they were set on the right path by a personally tailored property investment plan:
- Buying a property in a location that is not attractive to tenants, i.e. not close to amenities such as shops and transport. These types of properties will generally have higher vacancy rates and lower rents, which limits the cash flow of the investor.
- Buying a property with a principal and interest loan, similar to purchasing an owner-occupier home. Only the interest component of the loan is tax-deductible, and the amount of money you spend paying off the principal limits your cash flow to purchase additional properties. This is why investors prefer interest-only loans.
- Buying an older property, which can drain your finances through maintenance costs. New properties may come with a builder’s warranty, and they also allow investors to claim the maximum tax depreciation benefits.
- Not undertaking a full assessment of the true cost of buying and holding the property. For example, if the property is an apartment, there are additional cost issues compared with 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.
- Purchasing in an area where there is an oversupply of rental properties, meaning rents will be low and capital growth rates limited. Without capital growth, you will not have enough future equity in the property to use as security to purchase your second and third investment properties.
- Trying to select the tenant yourself, rather than using the services of a reliable property management company. Bad tenants will not pay their rent and will damage the property. After experiencing a bad tenant, many first-time investors often sell their property because of the financial losses incurred.
- Buying an investment property for a quick return, rather than viewing it as a long-term investment and a ladder to purchasing a portfolio of properties that will fund your retirement.