"As a property investor you should map out where you want to be in five, 10 and 15 years’ time, then construct a detailed plan to take you there."
Nine classic mistakes foolish property investors make
Property investing may be simple, but it’s not easy. And that’s not a play on words.
When you look at the statistics and see that most investors never get past their second property, you realise that most who get into real estate won’t achieve the financial freedom they were looking for.
While it’s possible to make good money in property, it will be more of an uphill battle in the current slow real estate markets. However, avoiding some classic mistakes will help keep you on the right track.
So let’s look at them.
1. A plan? I’ll just go ahead and buy something
Deciding you’re going to be a property investor is more complex than just buying a property. Approaching investing without a well thought through strategy that fits in with your long-term wealth creation goals and financial situation is a fool’s journey.
You would never take off in your car without knowing where you intend to go and how you plan to get there. As a property investor you should map out where you want to be in five, 10 and 15 years’ time, then construct a detailed plan to take you there.
2. I can do it all myself!
All successful property investors build a great team around themselves. I often say that if you’re the smartest person on your team, you’re in trouble.
However, you can’t blindly hand over financial control to your finance broker, accountant or solicitor. It’s your responsibility to gain knowledge about the property investment business and become financially smarter – what I call financially fluent. This will teach you the right questions to ask your advisors.
3. Research? Who needs it
I’ve met investors who researched the purchase of their new car more carefully than their investment property.
Many buy their investment close to where they live, where they holiday or where they want to retire. They make emotional purchases in locations that are in their comfort zone.
The due diligence that goes into purchasing an investment must be more rigorous than that.
As an investor, there are only three good reasons to “fall in love” with a property: it fits your investment strategy and goals; the numbers work; and it has upside potential.
Never let your emotions drive your investment decision; that’s what homebuyers do, not people looking to create wealth with real estate.
4. Losing sight of the big picture
Sure, property is a long-term investment and the costs of buying and selling are considerable, but that doesn't mean you should fall into the trap of not regularly reviewing your property portfolio.
Do you own the type of properties that will allow you to take advantage of the next property cycle?
Remember, over the next few years some properties will strongly outperform others. If you own secondary properties or real estate in areas that are unlikely to benefit from strong capital growth, it may be worth selling up and replacing them with the type of property that will help you develop long-term financial independence.
When was the last time you checked to make sure you were getting the best rents or that your mortgage was appropriate for the current times? Maybe it's time to refinance against your increased equity and use the funds to buy more properties?
5. I’m going to buy a property and make millions!
If you are like me, you get regular emails promising you instant real estate riches. These pander to those investors who are really speculators looking for that one big deal that will make them overnight millionaires. Trust me, these doesn’t exist!
Warren Buffett wisely said: “Wealth is the transfer of money from the impatient to the patient.”
Successful investment is about patience and time. It can take two to three property cycles to build a sufficiently large asset base to allow you to fire your boss.
7. I’m looking for a bargain!
Sure you make your money when you buy your property, but you set yourself up for property investment success by buying the right property, not a cheap property.
8. A lick of paint and I’ll make a killing!
Popular TV shows like The Block have created a new generation of “want to be” renovators and developers.
I’m all for adding value through renovations; but you can’t buy a property, do minimal work and then sell it at a profit, because stamp duty, buying and selling costs and tax eat away at your profits.
On the other hand, buy, renovate and hold in the long term is a great investment strategy.
9. Risks? Bah-humbug! Bring on the rewards!
Some investors don't understand the risks associated with property investment and therefore don't manage them correctly.
Strategic investors don't only buy properties; they buy time by having financial buffers in place to not only cover their negative gearing, but to see them through the down times like we have experienced in the last few years.
Another way smart property investors protect their assets is to buy them in the correct ownership structures to legally minimise their tax and protect their assets. Most wealthy property investors own nothing in their own names, but control their assets through companies or trusts.
The reality is that if investing in real estate were easy, everybody would be successful at it. Fortunately, many of the struggles that investors endure can be avoided with proper education, planning and due diligence.
Michael Yardney is the director of Metropole Property Investment Strategists, a best-selling author and one of Australia's leading experts in wealth creation through property. He also writes the Property Investment Update blog.