What are the pros and cons of investing in a commercial property?
What are the pros and cons of investing in a commercial property? Read on to learn more. ...
There are some things you can't control about your portfolio's growth, but these common mistakes are completely within your control and could be costing you dearly without you even realising.
Blogger: Sam Saggers, CEO, Positive Real Estate
As property investors, there are many things we can’t control about our portfolio’s growth.
For example, factors such as market fallout from natural disasters or global economic volatility do have an impact on the returns we can achieve.
However, rather than worry about things beyond your control, focus on what you can do to maximise your returns while minimising any detrimental impacts on your portfolio.
The following six investing mistakes can have a negative effect on your portfolio. Do any of them look familiar?
1. Failing to structure your finances properly
Essentially, there are three main ways to own a property:
● In your own name
● In a company or a trust structure (or a combination thereof)
● In a superfund
The method you choose will depend in part on what you want to do with the property in the future.
In your name
As an example, if you’re at the beginning or acquisition stage of your property-investing journey, you’ll need as much cash flow as possible. So you’ll want to put your property in a structure that makes it fairly simple to access your equity, such as in your own name.
Other great reasons to buy under your own name:
● It’s more straightforward than it is with a trust or other corporate entity.
● You can easily get a tax deduction. As a PAYG earner, you can file a PAYG variation (221D) to gain access to money you’re owed during the year, rather than wait until tax-filing season to claim.
This structure isn’t perfect, however, as buying in your own name offers no protection for your assets.
A company tax structure
This structure offers the following benefits:
● Ability to offset profits (e.g. capital gains) and losses
● May be able to adjust income tax.
● Can be cost prohibitive. It can take thousands, perhaps tens of thousands of dollars, depending upon your portfolio.
● Difficult to obtain finance.
Cross-collateralising your loans may let you borrow more, however, it’s typically not recommended, as it can impact your portfolio returns and slow down your progress.
The following problems can occur with cross-securitised loans:
● Borrowing more than 80 per cent means the mortgage insurer will calculate its premiums on all of the financing, not just the new loan. Obviously, this can add significantly to your costs, perhaps even reducing the amount you may borrow.
● It is possible that should you choose to sell one of your cross-securitised properties, the lender may require you pay down the debt rather than do what you had planned with the money (e.g. purchase another investment property).
● The lender may revalue all of the properties – adding significantly to the paperwork, time and cost – just to access your equity.
3. Invest only in your own backyard
As comforting as it may be to drive by your investment property on the way home every week, it’s much less comforting to see cash flowing out of your wallet because your investment is a dud, wouldn’t you say?
The best way to avoid this kind of scenario is obviously to buy in growing markets. This, of course, means buying interstate at some point in your investment journey.
Key reasons to buy interstate include:
Just as your share portfolio should be diversified to spread the risk from poorly performing investments, so too should your property investments be in a variety of marketplaces.
The rules regarding land tax differ across state lines. If you exceed the threshold in one state requiring you to pay, then you can choose another one where you’re not over the limit.
Careful management of your portfolio can certainly help you manage the land tax you must pay.
4. No strategy
Without a strategy, you’ll get stuck, perhaps buying only one or two properties rather than the six or more needed for financial freedom.
Before defining your strategy, set well-defined goals followed by specific actions needed to achieve them.
Although you can successfully invest using one or two particular strategies (e.g. renovation, strata), challenge yourself by trying a new strategy when possible.
5. Wrong strategy
The wrong strategy can put the brakes on your plans quickly. For example, if you’re trying to build your investment portfolio and choose a property that is negatively geared, you’ve effectively tied your hands with regard to growing your portfolio.
6. No support team
One of the best things you can do for your property investing success is assemble a team of property experts you can call upon whenever you need their help.
For example, establishing a good relationship with agents in different markets is a smart strategy. If they know you’re a serious investor, you will be on their shortlist (especially if you routinely keep in touch with them) for deals that hit their desk...before they’ve even listed them.
Now, I don’t know about you, but getting the inside scoop on a great deal is worth the effort it takes to step outside of your comfort zone and meet other individuals who can help you achieve financial freedom.