10 common mistakes to avoid for new property investors
Are you looking to start investing in property? Luckily there’s a plethora of information available online for those who are looking to make their next home purchase a successful investment.
However many bright-eyed and bushy-tailed investors start with big dreams, while only a small percentage of investors will ever make it past their initial investment, meaning that an even smaller fraction of investors find themselves creating significant wealth through multiple investment purchases.
The recent property market boom may have lulled new investors into a false sense of security and as they navigate landscape of the property cycles. Experts believe there are sure to be unforeseen and unexpected challenges to come.
Every property is different, which means their values won’t increase at the same rate as others. While affordability constraints become a key factor – some locations may not see their home values increase as expected or for many years. This means that new investors won’t be able to rely on the market to do the hard work for them and it will become critical for investors to carefully choose their purchases.
So where do new investors usually take a wrong turn? In this article, we’ll guide you through the top 10 common mistakes new investors make, along with some tips to avoid them.
1. Letting emotions drive your purchase
According to property experts, a majority of home buyers let their hearts guide their purchases instead of using logic. This is natural as buyers consider whether the property would be a good fit for their future families or long-term goals, however, this is a common mistake that may lead to disappointment further down the road.
Letting your emotions cloud your judgment could lead to paying more for a property than you should, rather than negotiating the best price and outcome for your long-term investment goals.
If you’re just starting your journey in property investment, it’s essential to make your purchase based on data and analytical research. Have you looked at the local demographics?
How will this influence your future capital gains and return goals? Is the property in a great location to attract high-quality rental tenants? Or will it be an attractive offer for the owner-occupier market that sustains property prices in the long run?
Remember that at the end of the day, a good investment is driven by economics, demographics, and well-kept finances instead of emotionally charged decisions.
2. Failing to plan ahead can lead to disappointment
The main vision for many property investors is to build a successful property portfolio that will allow the luxury of financial freedom and an array of assets in your pocket. However, just like any game, entering the ever-changing landscape of the property investment market without a solid strategy and plan could mean you could meet challenges you were not prepared for and feel lost or stuck.
In order to successfully create wealth through property investment will require you to roadmap your goals and build a sound plan in order to achieve them. Focusing on both long and short-term strategies are important, and each of your investment decisions will need to align with your overall strategy.
- Take the time to identify what you want to achieve in terms of income, whether you’re after a short-term yield or long-term capital growth.
- Determine whether your goals are realistic for your situation
- Track and measure your progress. Is your investment working for you or is it the other way around?
- Think of ways to maximise and harness wealth creation through property.
- Identify any risks you haven’t previously considered by speaking with your financial advisor beforehand or a buyer’s agent during your property search.
- Think about how you can best manage your finances as a savvy investor.
With a solid action plan and roadmap for your investment journey, it is much more likely that you’ll be successful with your investment goals.
3. Jumping in too soon, or waiting too long
Two incredibly common traits that equate to challenges buyers face in securing their first investment property or subsequent investment purchases are: either buyers act too impulsively and make poor choices or they are so risk-averse that suffer from paralysis from analysis and fail to act when the time comes.
Regardless of how many books, podcasts, or seminars budding investors may utilise as resources prior to entering the property market, it’s easy to be overwhelmed by information and ultimately end up being unsure about whether they’ve made the right investment decision.
Unlike the stock market, where only a few realistically succeed, real estate, on the other hand, produces a high number of wealthy people and only a handful of losses.
With this in mind, if investors get their timing right with property investment ( buying low and selling high within the property cycle), it can have a huge impact on their returns and overall wealth.
4. Speculating over being patient
Many investors expect to become millionaires overnight, however investing in property for short-term gains isn’t a band-aid solution to any financial problems they may be facing, and this quick “buy and flip” method is more about speculation than a strategic approach to investing. It can take time to sell investment homes, along with the array of costs involved such as capital gains tax.
Experts estimate that it can take 20-30 years of building a large enough asset base to allow for investors to enjoy the pay-off from their hard work and reach financial freedom. In other words, it’s not as simple as buying a home or two and living off that cash flow.
Simply put, property is a proven commodity that everyone needs, it provides steady long-term gains through the power of compounding. Investors can use the gains from one property to leverage themselves into another, with the combined gains allowing buyers to further add to their portfolio.
5. Not doing your due diligence or research
If you’re not careful or you’ve jumped in on a property without enough research you may find yourself in a bit of a twist.
Choosing the right location is critical to your goals, specifically selecting locations that will outperform the averages due to factors such as gentrification or a demand from a demographic of affluent owner-occupiers.
Before you jump in and buy a property, it’s important to consider the investment grade of your potential purchase.
Ask yourself the following questions when assessing your purchase:
- Does it appeal to a wide variety of owner-occupiers within your desired demographic?
- Is the property in a good location close to amenities such as shops and transport?
- Is it considered safe and provides residents with security?
- Does it have street appeal or desirable aspects such as a nice view?
- Does it offer secure off-street parking?
- Can you add value through potential renovations?
- Does it have a high land-to-asset ratio?
Buying an investment in the right location will provide a strong driving force behind your property’s capital growth.
6. Poor financial management
As a new investor, a common trap many succumb to is poor cash flow management. Seek advice from a reputable financial advisor or professional accountant who is familiar with real estate and ensure you understand all the costs involved in acquiring and holding a property. It might be a significant financial commitment after you tally up the costs, so make sure it’s right for your financial circumstances.
Consider the earning capacity of the property along with whether it will be enough to cover your outgoings. Are you able to cover any deficits? Have you taken extended vacancy periods into account as well as any emergency maintenance costs?
To avoid any nasty surprises, a good rule of thumb is to allow roughly 10% of the property’s value for a range of costs such as council rates, land taxes, insurance, professional services, maintenance, and management fees.
7. Financing errors
The property investment game is essentially one of finances with a few homes thrown in the mix. For new investors, seeking help from a qualified professional mortgage broker is absolutely essential.
The right broker will help you arrange and navigate the tedious and time-consuming processes surrounding financing your property investments, and they will ensure you attain the correct type of finance, potentially saving you thousands in the future.
On the other hand, should you decide to manage this on your own, avoid mistakes like setting up an incorrect financial structure as this could seriously jeopardise your investment goals.
If you’re looking to start your property investment journey and need to speak with an experienced broker, get in touch with our team at Rateseeker. We’re here to help seek the sharpest rates, as well as guide you through the process.
8.Not being thorough enough
You might think you’ve found the perfect property, but how much do you really know about it? Do you know the vendor’s motivation to sell the property? This can make a significant difference when it comes down to negotiating price.
Looking at the property, ask yourself whether the home is comfortable/livable and whether the floor plan is appealing for tenants who will be paying you to live in the space.
Make sure you’re thorough and carry out the relevant inspections and reports on pest infestations, structural defects, and more. It’s certainly worth the peace of mind and possibly thousands in savings, especially since these costs are tax-deductible.
Cutting costs through self-managing
New investors may think that once they’ve done all their homework and found the perfect home to buy, the hard work is over. Don’t be fooled, as it’s only just begun.
Managing your own portfolio may seem like a great way to save, however, if you’re really looking to build a decent portfolio, there will come a time when it may become a little overwhelming.
Do you have the time and experience to find suitable tenants or know legislation and laws pertaining to renting? Do you understand the value of your property to price accordingly in the market? Are you able to conduct regular inspections to ensure your assets are in good condition in addition to collecting and managing rent and representing yourself at tribunal if you run into disagreements? With maintenance and possible building issues that may arise, managing your investments may become a full-time job.
A property manager can provide a wealth of knowledge and experience in these areas, as well as freeing up your time ( one of the most valuable assets you have) and good returns mean the properties need to be managed and cared for properly. At the same time, you can use these hours to further add to your portfolio and build your wealth.
Looking to get started with your investment journey? Speak with one of our mortgage experts with an obligation-free consultation and we’ll help guide you through each step. Simply head to our website and contact us to start building your portfolio today.
** General Advice Warning
The information provided on this website is general in nature only and it does not take into account your personal needs or circumstances into consideration. Before acting on any advice, you should consider whether the information is appropriate to your needs and where appropriate, seek professional advice in relation to legal, financial, taxation, mortgage or other advice.