Investing in property can be a fruitful investment if it is executed correctly. There are a large number of reasons why investors fail or under capitalise when investing in property. We have identified the following five mistakes that property investors should be mindful of before investing.
Emotional connections to a property can be the cause of a bias or subjective decision to acquire. Two of the most common ways for an investor to carry emotion into an investment property is to either have previously lived in the property as a principal place of residence (PPR) or acquired an investment property they could see themselves moving into one day when they retire. While both scenarios will not always lead to a bad investment, it might create inconsistencies in your investment objectives.
Removing the emotional attachment from a PPR that you’ve built memories in is often difficult. You will often see value in sentimental aspects of the house that may not have great value in the market, both as a property for sale or rent. It’s important to consider every investment property acquisition objectively and understand how the property will perform under the circumstances.
An easy way to conceptualise this is by looking at the opportunity costs associated with holding this particular asset. Holding this asset may limit the investor from utilising the capital or equity on a different asset more suited to their investment objectives. Before you think about acquiring an investment property, research and conduct due diligence objectively.
There are many strategies for investing in property, the most common is to generate equity from the capital growth of the property. The property market is relatively slow moving and won’t double your money overnight. You will need to spend time in the market for the property to mature and appreciate.
Be mindful of your market timing, if you are like 11.8% of Australian investors in the March quarter to sell at a loss, you failed to understand the importance of time in the market. That goes without saying that the initial investment itself must be well researched and considered, otherwise you may need more time in the market if you’ve purchased an overpriced or underperforming asset.
Neglecting Operating Costs
The operating costs of a property will depend on the asset itself. Associated operating costs of investment properties include rates, insurance, property management, but you may also have body corporate levies, maintenance, pest inspections and treatment, fire alarm inspections and periods of vacancy.
By understanding your operating costs, you can calculate the true holding costs and ultimately the performance of the property. Particularly for investors in holding patterns to achieve capital growth over time, there are ways to reduce your operating costs and increase your cash flow by correctly structuring your investment property and finance.
Incorrect Finance Structure
Incorrectly structuring your finances can have a significant impact on the performance of an investment property and portfolio. More importantly, the incorrect financial structure can diminish your tax offsets, reduce your cash flow and increase holding costs of an investment property.
Structured mortgages are something that is often overlooked by investors. By avoiding structures like cross-collateralisation you can mitigate potential risks and protect existing assets. It is also important to consider the tax implications around investment debt in comparison to PPR debt. By reducing your PPR debt and increasing your investment debt you can structure your property finance in a way that will allow for higher tax returns.
Too many investors don’t understand the importance of an offset account, particularly linked to your PPR facility. There are a number of ways investors can benefit from an offset account, which can lead to reducing non-effective debt sooner.
Failing to Plan
Failing to develop and sticking to a plan can lead investors to acquire unsuitable property assets. By not planning, investors may unwarily acquire property assets that include:
- Properties over the investors’ budget
- Low growth properties
- Low yield properties
- Properties requiring too much capital to renovate or maintain
- Damaged properties
By developing a plan or strategy for investing in property will reduce the likelihood of making mistakes when it comes time to buy. Set your plan or strategy based on your circumstances and what you want to achieve through investing in property. Whether that’s long-term capital growth, increased cash flow now or renovating for capital improvement for short-term growth. These options are all suitable if they obtain the intended outcome and the property assets will need to reflect the performance criteria.