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Buying an investment property can be a great way to create personal wealth over the long term – just look to some of the world's wealthiest people for proof. Follow their lead by avoiding these simple investment mistakes.
Blogger: Paul Bennion, managing director, DEPPRO
This is underlined by the fact that many of the richest people in Australia are big property investors, who see property as excellent way to invest their wealth.
Even the king of stock market investing, Warren Buffett, has bought into property and learnt valuable lessons from his experience, which have then assisted him in creating even more personal riches. Click here for an article outlining a number of Warren Buffet's astute property investments.
However, the hard reality is that many first-time investors never move beyond buying their first investment property because they make simple mistakes.
By avoiding these simple mistakes and learning from mistakes of others, first-time investors can eventually build a successful property portfolio that can help them enjoy a great lifestyle.
Below are 10 of the most common mistakes made by first-time investors:
1. Failing to undertake property research before buying a property. Research is critical when buying an investment property. Most real estate institutes throughout Australia provide free online information on their websites about the long-term performance of individual suburbs in terms of capital growth, which is a good resource for first-time investors.
2. Taking a narrow approach to buying by deciding to buy an investment property close to their existing home rather than looking at investment opportunities throughout Australia. That could mean that first-time investors achieve below-average capital growth rates and miss out on potential property hotspots in other locations.
3. Selecting a property based upon advice of friends or family rather than seeking independent information. It is important to seek out people who own several investment properties and ask them how they managed to build their portfolio. They can provide very important tips on how to avoid simple traps and pitfalls when buying investment properties.
4. Failing to obtain a tax depreciation schedule for the property. The tax benefits derived by a depreciation schedule can be as high as 60 per cent of the rental income and this additional cash flow can assist the investor to purchase additional properties.
5. 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 to buying a standalone house, such as strata fees.
6. Selecting the wrong home loan ie. principal-and-interest, which is typical for an owner-occupier home. Instead first-time investors should focus on interest-only loans which will help increase cash flow.
7. Buying a property in a location which is not attractive to tenants ie. not close to amenities such as shops or transport. Investors can also buy a property in an area where there is an oversupply of properties meaning rents will be low and capital growth rates limited.
8. Trying to manage the investment property themselves rather than engaging the services of a professional company. This can lead to mistakes such as selecting a bad tenant that could result in loss of rent and damage to the property.
9. Selling their property in the short term rather than taking a long-term approach as advocated by billionaires such as Warren Buffett.
10. Failing to maintain the property which will result in a devaluation of their investment and lower rental returns.