Property investing can be extremely rewarding if you get it right, but it certainly doesn’t come without pitfalls. It’s very important to arm yourself with the right information and be aware of the common mistakes made by property investors when trying to build a portfolio. By keeping these mistakes in mind, you can mitigate risk and prepare yourself with an exit strategy if need be.
1. Lack of strategic planning
A lack of strategic planning is common with DIY investors who tend to rush out to buy their first investment property without considering the big picture. By sitting down and working out what you actually want to achieve from buying or investing in property you can avoid mistakenly buying the wrong property for your purposes.
Strategic planning in property investment involves identifying what the key focus and desired outcome of your investment is. This could be increasing net worth, generating income, lifestyle improvement or retirement funding. Whatever your ultimate goal is, identifying your purpose and building your strategy around it will guide you to make the best purchase to suit your needs.
Overpaying is prevalent in both the owner occupier market and with first time investors where emotions have a stake in the purchase. Some inexperienced buyers will make the mistake of telling an agent they have a certain amount of money to spend, which is an amount that far exceeds the actual asking price of the property.
By keeping your cards close to your chest and taking a breather you can avoid getting overexcited and caught up in paying more for a property just because you want to snap it up.
When a buyer applies for finance on a particular property, the bank will send a valuer out to ascertain its worth and to ensure it is adequate security for the mortgage the buyer is seeking. If the bank’s valuation does not match the asking price, the potential buyer will need to either walk away from the purchase or overpay. This can be a timely, exhausting and potentially costly process, which is why research and due diligence is so important.
3. Lack of solid research and due diligence
Purchasing a property as an investment is quite different to purchasing a property that will serve as your family home. The considerations differ greatly and non-negotiables you may harbour for personal reasons may not necessarily align with the rental or re-sale market. By removing emotion from the property purchase and instead undertaking solid research and due diligence, you will be far better equipped to make a sound investment choice.
Some of the key considerations when collating data and performing due diligence include:
- Looking at comparable sales and identifying what a property is really worth (not just being guided by the asking price);
- Investigating the property’s proximity to flood zones and transport noise corridors;
- Assessing the new housing supply coming into the area; and
- Considering current vacancy rates, concentrational location and density of social housing.
All of these factors can impact on the purchase price and a property’s performance and it’s often not about buying in the area you would personally choose to live in but investing in a location that makes the most commercial sense.
4. Buying in the wrong area
Buying in the wrong area is usually a flow-on effect from a lack of strategic planning and a lack of solid research. Without a plan and some due diligence, buying in an area without strong capital growth is a high risk.
To put this into perspective, there are currently 15,281 suburbs in Australia, with only 52 of those suburbs around the nation marked on our target list of high-performance suburbs for investing in. That equates to only 0.3 percent of all suburbs in Australia, which really highlights the importance of having the correct research and analysis behind the investment making decision.
5. Analysis paralysis
It can be quite easy to get quite overwhelmed by the vast amount of information available and this can lead to a state of feeling too overcome to make any decision or take any action at all.
It is important not to get bogged down in overanalysing the market to the extent that you fear making an investment – part of investing is about taking a certain amount of risk and it is understanding your own appetite for that risk that will guide your strategy, equipping yourself to minimise risk and, ultimately, help make the purchase.
6. Trying to time the market perfectly
While it is important to try to buy in an area that is in the right stage of the market cycle, trying to perfectly time it is never a wise idea.
While you are waiting for the right time, you may miss out on other prime buying or selling opportunities. The Sydney market is an excellent example of this. In early 2017, plenty of people who did want to sell held off on selling their properties because they were waiting for the market to peak. Prices were very strong and there was a lot of demand. People waited, thinking the market would keep rising and that they could hold out for just a little bit more money, but before they knew it the market had reached its peak and the moment had passed. Those same people who had been looking to sell came off the wrong side of the peak when the prices began correcting and they were forced to sell before the prices dropped even further.
Trying to squeeze that extra little bit of money out of a sale can actually be a very costly mistake. Conversely, the same thing can happen when buying a property, by trying to hold off on making a purchase until the prices correct again. If the market has the fundamentals right, and it makes sense to buy in that area, then strike while the iron is hot rather than trying to time the purchase perfectly to get the cheapest price.
The common thread tying these six mistakes together is that you should use your head and not your heart when it comes to investing. Define your focus, build your strategy, do your research and don’t overwhelm yourself and you will be on track to make the most viable investment for your purposes.
Jay Anderson Property
0410 746 200