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Interest rates are very low and real estate markets are on the move, which can only mean one thing – it’s a great time to buy an investment property. But before you dive in, be careful that you’re not making one of these three common mistakes that many investors make when interest rates are this irresistibly low.
Blogger: Paul Wilson, Educating Property Investors, We Find Houses and We Find Finance
Mistake #1 – Failing to see the real deal
When you’re evaluating a potential property deal, you should look carefully at the numbers to make sure it achieves your goals. For instance, let’s say you’re looking for a positively geared investment – in this instance, you would work out all of the costs of owning the property to make sure that the rental income exceeds the costs.
If your home loan interest rate is 7% and you crunch the numbers, the deal may or may not stack up. But when you can get a mortgage at just 5%, there’s a good chance the deal will be positive or at least neutral, once tax deductions and benefits like depreciation are taken into consideration.
And this is where investors can run into trouble. Low interest rates can actually make a fairly average property seem like a great deal. This can leave you in a world of pain when interest rates do eventually increase, if your positively geared property suddenly starts costing you money each week.
Of course, if low interest rates have helped you to secure a capital growth property then when interest rates can and do increase, your property will ideally have grown in value and the positive cash flow will be your secondary benefit.
My advice is to use low interest rates as an opportunity to secure a growth property knowing that it is underpinned by the right fundamentals to grow in value and keep you at a neutral perspective, if and when rents increase. Also, calculate the figures based on an interest rate of 7% to ensure the property still works for you at a higher rate, so you don’t accidentally invest in a dud property.
Mistake #2 – Locking in a fixed rate
There are some incredible fixed rate mortgage offers on the market right now, with some three-year rates under the 5% mark. These mortgages represent incredible value, but that’s only the case if you plan to hold the property for the foreseeable future.
The problem for some investors is that low fixed rate offers are often so tempting, they hurry to fix part or all of their loans, without thinking about the consequences should they want to break the loan. Loan break costs can be heavy – I’m talking thousands or even tens of thousands – and there are also other considerations.
For instance, what if you want to pay more than the minimum mortgage repayment each month? Some fixed loans don’t allow additional payments. Fixed rate loan products are not very flexible, so it’s important to weight up all of the loan features you need (now and in the future).
Also keep in mind that if you have any bad debt – such as credit card debts, personal loans, even your own home mortgage – then you want to target that first for repayment. When you fix, you may lose an opportunity to offset your funds against bad debts. These can be complex situations to review, which is why I believe developing a relationship with a qualified mortgage broker is a must.
Mistake #3 – Rushing in
I know what it’s like when the property bug bites – real estate is nothing if not addictive! As a result, we can tend to rush into deals in an effort to tap into that unique adrenalin rush that comes with locking in a great property investment.
Here’s the thing, though – rushing into anything is never a good idea, especially if that thing happens to be the purchase of an asset worth hundreds of thousands of dollars! There will always be more properties, more deals and more opportunities, so don’t go skipping essential research and number-crunching, or you may rush into something you regret down the track.
Interest is the amount of money charged by a lender or financial institution for a loan, which is calculated as the percentage of the principal amount paid over the loan term.
Property refers to either a tangible or intangible item that an individual or business has legal rights or ownership of, such as houses, cars, stocks or bond certificates.