The 7 most common property investment mistakes
When it comes to purchasing an investment property, falling into any of these traps could stop your portfolio in its tracks.
Blogger: Daniel McQuillan, executive director, Investwise
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The first of July traditionally sees a flood of new property investors entering the market with the start of the new financial year.
In the lead-up to this date, many first-time investors will be giving thought to buying a property.
If you plan to buy your first investment property after 1 July, then there are seven simple traps you can avoid that will mean you can build a successful portfolio.
It is an unfortunate fact that too many first-time investors never buy more than one property, because they choose the wrong one as their entrée into the real estate market.
Some of the most common mistakes to avoid when buying your first investment property include:
1. Buying a property in a location that 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 will limit your cash flow.
2. Buying the 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 on paying off the principal limits your cash flow to purchase additional properties. That is why investors prefer interest-only loans.
3. 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.
4. 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 and limit your ability to buy more properties.
5. Purchasing a property in an oversupplied area, where 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 investments.
6. 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 may damage the property. After experiencing a bad tenant, many first-time investors sell their property because of the financial losses incurred.
7. Buying an investment property for a quick return, rather than viewing it as a long-term investment and stepping stone to purchasing a portfolio of properties that will fund your retirement.
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