Some say failure is the best source of learning you could ask for. Lucky for you, there’s already a sea of common mistakes to avoid when investing in property that you can learn from to prevent property bloopers yourself.
We always talk about what you need to know when investing in property and what you should do, but what you should NOT do is arguably just as important.
Avoiding common mistakes when investing in rental properties can mean the difference between success and a dud investment property. Without due diligence, your financial stability and your capital growth could be on the line.
We’ve outlined 11 common mistakes to avoid when investing in property to help you stay on the right path.
1. Investing with your heart, rather than your head
We like to think that we’re rational, but a matter of fact is that emotions play a massive part in our decision when we buy our home. For your investment property, that’s what you need to avoid at all costs.
Being a successful investor means putting emotion in the back seat and treating your property like a business.
Picture this: You’re at an open home inspection, you love the look of the place, and it seems like it’s in just the right neighbourhood. The broker tells you that they’ve had several offers and that you need to jump on today if you want a shot at landing the property. The FOMO creeps in, and you’re getting conflicting emotions. Do. Not. Buy!
In the scenario above, you should always sleep on it and do more analysis about the property’s capital growth and rental yield.
Apart from just buying and selling properties, treating your property like a business includes:
- Not renting your property to family & friends
- Raise the rent when you know you should
- Bring a property manager on board to help make objective decisions
- Don’t fall in love with your property
Objectivity is the game’s name, and being analytical is the game plan if you’re going to be avoiding common mistakes of the real estate world.
2. Skimping on the research
In the world of rental properties, you can’t blame your dog for eating your homework! If you skimp on your research, you’re only fooling yourself.
We get that extensive research can feel a bit tedious, especially if you’ve been eyeballing multiple rental properties for some time. Still, it’s essential if you want to avoid the wrong investment property.
Here are some key things you’ll need to ask yourself before buying:
Are you buying old or buying new?
The great thing about new properties is that you can claim depreciation on your tax returns, and you end up saving quite a bit of money not having to do constant property maintenance like you would with older properties.
But as you might expect, getting around the high capital requirements can be a challenge, particularly for first-time investors. You might also lose those mentioned savings because of hidden commission and fees when you buy new properties from an agency.
Older properties can be more work but are an excellent opportunity for property renovations to increase value. They are also more accessible since their price is lower and can give you significant capital gains if they’re situated in growth suburbs in Australia.
What’s the condition of the property?
Are there holes in the walls? Stains on the carpet? Scuffs on the floorboards? Do the taps and lights switches work?
These obvious signs of damage are the things to keep an eye out for when you first inspect the property. Bring your magnifying glass and channel your inner Sherlock Holmes when you’re studying a property. Any damages you find might be a good reason not to buy the property, or you could get the cost of fixing the damage deducted from the listed price.
Does it have features and amenities tenants want?
If your investment property is your business, then your tenants are your customers. It might sound obvious, but it’s vital logic to remember when you’re checking out the desirability of your rental property.
Constantly tailor your property so that it’s aligned with your customers’ needs. What’s your target market? What do they want in a property?
We suggest reading our article on how to research what tenants want where you’ll find a checklist of questions you should ask before you buy.
3. Cutting out the experts
Everyone’s different, but we can assure you that asking experts for advice is usually a good idea.
It’s widespread that we have property owners bring us on board to help solve disputes or help get the property portfolio in order.
If you feel like you’re in over your head or need a second opinion, we recommend you go for it.
Here are some good experts that can help you out with various situations:
- If you have concerns about your cash flow or your taxes, an accountant can help.
- Any concerns about your mortgage or repayment of property loans can be brought up with your mortgage broker.
- If you need help doing a thorough property inspection, you can bring a surveyor or real estate broker along.
- If you have problem tenants with lots of arrears or just feel like managing your properties is taking too much time, you can hire a property manager to do it for you.
4. Not having a property investing strategy
If you’re going to become an owner and a successful one at that, you need first to know how to get your foot in the door. That’s where an investment strategy comes in.
Most things in property come with a trade-off. Low-cost properties offer lower returns but are easier to buy, while high-cost properties are harder to get capital for but yield greater returns. Depending on what you have saved up, there are many different ways to get your foot in the property market.
- Say you have a close relative who’s willing to stake some of their home’s value to help you secure a loan. You could be looking at going the route of a guarantor loan.
- On the other hand, if you want to go at it yourself without having to cross the high-cost entry barrier, fractional ownership might be the strategy for you – buying shares in a single property and receiving a fraction of the rent and capital return if the property is sold.
Which option to go for really depends on your financial situation. This is why when people ask us, “is now a good time to buy a property?” we always say: “As long as you have your financial ducks in a row, it’s always a good time to buy.”
Check out our article on the seven most common investment strategies for an in-depth look into your options for getting into the property market.
5. Not having a property financing plan
Do yourself a favour, and don’t wing it when it comes to your property finance. Know exactly how you’re going to cover those ongoing costs like loan repayments and utilities.
Know your financial goals and how much risk you’re willing to take before you begin, and what you can afford regularly. If everything hits the fan and you lose your income, how many months can you cover your bases?
You should also consider whether you want to gear your property or positively gear your property negatively.
Negatively geared properties run at a net loss when your rental income and holding costs are calculated at the end of the year. About 60% of Australian properties are negatively geared because it comes with tax benefits and unlocks higher capital growth properties.
Positively geared properties run at a net gain, meaning that your rental income is higher than all the costs of running and maintaining your property. The benefit is obvious – you get another source of income (albeit a small one). While it has been the less popular option, positive gearing is becoming more popular in 2021.
Finally, you’ll also have to choose between principle and interest or interest-only loans. We’ve made a dedicated article that helps you select the best loan structure for an investment property which we strongly recommend reading first.
6. Negatively gearing when you can’t afford it
Even though this strategy is a great way to reduce your taxable income and make big on the capital gains front, negative gearing comes with risk.
In the short term, you’ll constantly be losing money, and this is something you’ll have to be able to wear out.
This is why you have to make sure you’re in a solid financial position from the get-go, so you’re not forced to sell your property out of misfortune.
7. Buying the wrong property
With so many properties to choose from, it’s easy to see why first-time investors unwittingly opt for the runt of the property litter. If you want to know how to avoid a dud investment property, here are the things to consider when buying a rental property.
Think like a tenant
There’s no use pouring thousands of dollars into a luxury renovation so you can up the rent when your property is right next to a university full of students on a budget.
You need to know what the tenants in the area are looking for in a rental property!
The minor repair, the better
Keep your eyes peeled when you’re inspecting a property. The last thing you want is to buy a house that will cost you a fortune in repairs and maintenance. Wall cracks, dampness, telltale signs of pests are all red flags that should raise your eyebrows.
Don’t be a customer
There may come a time when some silver-tongued property marketer or flashy sales agent will try to sell you on an off-the-plan apartment. But never lose sight of the fact that these are salespeople, first and foremost. And what they want to sell you might not be what is best for you.
8. Buying for the short term
If there’s one truth about the property market, it’s that real estate needs time to appreciate. Time heals all, and it will recover your property investment if you give it a few years.
The longer you spend time in the market, the higher your capital gains will be, at least, according to Australia’s track record. Did you know house prices have jumped 412% since 1993?
Read our article about telling when it’s the right time to buy real estate to understand precisely why time in the market always beats timing the market.
9. Not leaving enough to live on
As attractive as property investment might be, you should think twice before diving into the deep end.
Don’t settle for something that isn’t an investment-grade property just because you can’t hold your horses.
Make sure you have stowed enough away to put down a decent deposit on a decent piece of real estate and have enough to cover those monthly loan repayments and holding costs for unforeseen mishaps.
Otherwise, you could find yourself in a constant state of financial stress, trying to cover your day-to-day expenses while also worrying about whether you can sustain your investment.
A good rule of thumb is to have 2 to 4 months of rental income saved up as a financial buffer if you want to be avoiding this common mistake.
The property market isn’t going anywhere, and we always recommend talking to a financial advisor before leaping.
10. Selling out of fear
Once you’ve made it into the property game, upfront costs and all, the real estate investing mistakes don’t stop there. You still have to weather the storm that is the property market.
Lucky for investors, properties have shown to double in value every 7 to 10 years. The only downside is that there are bound to be downturns during this time – a scary thing that drives many investors to sell prematurely.
So, don’t give in to fear, and keep holding onto your property if you can help it.
11. Not hiring a property manager
If you’re planning to self-manage your investment property, it’s something you might want to reconsider. While you save a couple of thousand dollars a year not hiring a property manager, the time and effort you spend aren’t worth it in the end.
In her book ‘59 Biggest Mistakes Made by Property Investors and How to Avoid Them‘ Helen Collier-Kogtevs makes this point:
“We managed our first property ourselves, and I will never repeat the experience. […] I recommend DIY property management only because it gives you a good insight into how much work property managers do to earn the relatively small management fee they receive each week.”
Helen Collier-Kogtevs, Property Mentor and Founder of Real Wealth Australia
There’s a reason 80% of property investors employ a property manager. If you think about it, it’s more worth it to keep your job than to quit it to become a full-time property manager, when you can hire a professional to do it for you for a couple of hundred dollars in property management fees.
We’ve assembled a complete guide with everything you need to know about property management, which we suggest reading through to help make your decision. You can also read our property manager vs self-managed comparison to help understand why self-managing your property isn’t usually the best option.
9 Things You Need to Know Before Buying an Investment Property
If you’re buying an investment property, we know that you want to avoid a dud property investment on your first shot. With hundreds and thousands of dollars on the line, it’s only normal to feel anxious about making a misstep.
And even though it gets easier with a few years of experience, the fear that there’s something you’ve missed doesn’t quite go away.
We’ve broken down what you need to check, decide and be aware of so you can pick a suitable investment property with confidence.
1. How will you finance your property?
As much as we wish it weren’t the case, you can’t have all the pros in property finance.
Depending on your financial strength and the amount of risk you’re willing to weather, you’ll need to choose between negatively gearing your property or positively gearing your property.
If you negatively gear your property, it means that you’re incurring more losses from the holding costs of your property than it generates in income (mostly rent).
You can then use your damaging cash flow property to reduce your taxable income. All of this is done with the expectation that when you sell the property, the capital growth will make up for the loss over time with a nice profit on top.
It’s a very viable but risky strategy since you need a solid financial grounding to begin with, so you can cope with the regular losses the property will endure.
Negative gearing is a great option for making the most of your property investment if you can weather out the month-by-month losses for tax benefits on a yearly basis.
About 60% of property investors in Australia are negatively geared, making it the most popular option for property finance. But, the latest real estate news is saying that negative gearing is on a downward trend in popularity and that positive gearing is making a comeback for 2021.
Just like the name suggests, positively gearing your property works in the opposite way to negative gearing. Instead of the property enduring regular losses, it makes a stable profit because it generates more rent than what it takes to run it.
It’s a less risky strategy for sure. One that has a lot of appeal to first time buyers. But it’s not always the most straightforward strategy to initiate – you could be looking at properties in regional areas if you want to make it work.
Positive gearing is a great option for first-time buyers who want to secure an additional source of income.
The passive income can be pretty slim as well, and the capital growth may be considerably less than that of the negatively geared variety.
Make sure you read up on positive gearing to get its pros and cons and when to choose it before making your decision.
P&I or IO?
IO and P&I are short for Interest-Only and Principal and Interest. Both have their merits and drawbacks.
Interest-only loans mean that you only pay back the cost of interest on your loan (usually 1-10 years). After that period, you begin paying both interest and repaying the amount you borrowed.
There’s no silver bullet to property finance, and both P&I and IO are valid, depending on your situation.
Principal and interest loans, however, have you repay your loan as well as interest from the get-go. That way, you pay more at the start, but the total sum of your claim is lower, which means that you’re saving money in the long term.
We’ve made an in-depth article about the best loan structure for investment property and when to pick P&I or IO, which we recommend reading before making your decision.
2. Where are you looking to buy?
The ‘where’ is just as important as the ‘what’. You need to have made up some thoughts about the location of your property and how that affects your returns.
“Sell the location, not just the property.”
Wayde Hildrew: Different Property Expert
Where do tenants want to live?
Different tenants want different things, but the following features and amenities are usually appreciated:
- Lots of restaurants nearby
- Public transport and train station within walking distance
- Being close to the university (if you’re renting to students)
- School districts
- Short distance to a supermarket
- A nearby park
Having these features will let you charge a higher rent and fill vacancies faster when leasing your property.
Read our article on how to research what tenants want to get a complete checklist.
Regional or urban?
Like most things in the property, choosing between regional and urban areas is a trade-off.
While urban areas have lower vacancy rates and good capital growth, they have a steep upfront cost and can be unobtainable for many investors.
Investing in regional areas has a lower barrier of entry but is also associated with much higher vacancy rates and slower capital growth.
But don’t write off regional areas too fast! Recent data shows that the regional property market is experiencing a boom in 2021 due to the COVID-19 pandemic triggering the work from the home trend.
Investing in property overseas
Buying property overseas is one of the great low-cost ways to purchase the property.
While owning a romantic seaside house in the French Riviera is bragging rights in itself, this investment strategy has real benefits. To name a few, you get access to low-capital requirement properties, you avoid putting all your eggs in one basket (or one property market), and you can use it as your vacation home.
You can read our article on how to invest in property with little money for a full breakdown of the pros and cons of investing overseas.
3. What type of property are you looking to buy?
Depending on what investing journey you’ve imagined, different types of investments might appeal to you.
House, unit, or land?
While a plot of vacant land might have the appeal of being a blank canvas for your big development project, it’s not a popular option because of the amount of time and effort you need to spend to turn a profit. Skill and in-depth knowledge of the area are vital if you want a chance at success. And since you won’t be earning any rent, staying on top of mortgage repayments can be very tricky.
Units, as well, aren’t all that forgiving for first-time investors. These properties come with strata fees and body corporate fees that can cut into your cash flow, unlike houses.
Houses continue to be the most popular type of investment property, despite the higher price tag, with about 37.5% of new purchases being houses and 33.7% being units, according to MCG Quantity Surveyors.
In the end, choosing the right investment property will come down to what you can afford and the level of risk you’re willing to take.
New or old?
Aside from the lack of property maintenance issues, what’s good about purchasing a new property is that you can claim far more in depreciation than you can with an old property on your property taxes. A great way to offset potential losses from those is holding costs!
Just be wary if you’re buying a brand new from a property marketing company since they tend to add commissions atop the price.
Even though they can run the risk of hitting you with more maintenance costs, older properties are an excellent opportunity to add value by renovating your property.
But, you’ll want to make sure you’re not buying something that will cost you more in repair than what it will make you in return. That’s why it’s a good idea if you’re not familiar with how to do a property inspection to enlist a professional building inspector before you make the purchase.
Residential vs commercial
The main benefit of choosing a commercial property over a residential is that you’re likely looking at a higher rate of return – around 5% to 12%. This is because commercial tenants are responsible for paying the outgoings on the property, meaning that you’ll probably enjoy a positive cash flow.
Lease terms can also be much longer than your standard residential property, which means you don’t have to worry about your property being vacant too regularly. At the same time, when commercial properties do go blank, it can take much longer to fill the vacancy.
It’s also much easier to finance the residential property. The usual borrowing amount is 80% for residential property, while it’s only around 60% for commercial properties.
A great deal of knowledge is required before delving into the deep end of commercial property investment. You need to be in tune with the movements of the broader economy, especially because demand (or lack thereof) for particular businesses will spell either success or disaster for your commercial property.
We recommend starting with a humble residential property, and you can start looking at the commercial property once you’ve got some experience under your belt.
4. What to look for in an investment property
Doing your property inspection is not an area for slacking. Different physical attributes can have a significant impact on your rental yield.
Here’s what you need to look for when you’re inspecting a property you’re considering buying:
Features that determine the value of the rental
- Number of bedrooms in the house
- If there is a separate dining room
- Size of the rooms and wardrobes
- The number of bathrooms in the house
- The size and state of the kitchen
- How much storage there is in the house
- If it has a garage
- Suppose the place is secure (i.e. no windows that are easy to break into). This will impact how much you pay in insurance.
- If the property has easy parking
- If the property will need a lot of maintenance
The general state of the house
- Check for cracks and holes in the walls
- Check for mould and water stains
- Make sure the air in cabinets is not damp or mouldy
- Check if anything needs to be repaired
- Check for any sagging parts of the ceiling. You can do this by shining a flashlight and looking for any pockets that look like a parachute.
- No rust in the gutters
- Make sure all the roof tiles are straight and in good shape
After buying, make sure that you’re conducting routine inspections to keep the property in tip-top shape! After all, interested buyers will look at the same things you once did when it’s time to sell.
5. Can you cover all the costs involved in buying an investment property?
If you thought that the price of the house was all you had to pay, then we’ve got some bad news for you!
To get the true cost of investing in property, you also need to consider:
- Valuation fee (approx. $300 for property worth up to $1m)
- Stamp Duty (approx. $9000 to $42,000 for properties between $310k and $1m)
- Legal fees (approx. $100)
- Lenders Mortgage Insurance (approx. $20,000 for $1m property with a 10% deposit)
- Loan fee (approx. $150-$700)
Not to mention the ongoing holding costs – utilities, insurance, repayments, council rates and all. Here’s a handy calculator that can help give an estimate of some of these purchasing costs.
6. How much can you borrow?
When it comes to taking out a mortgage, you can expect to put down a 20% deposit. That’s the standard.
It is possible to borrow up to 85%, 90%, and even 95%, but the eligibility criteria for these become more and more strict, as you’d expect.
But the main things to keep in mind when approaching lenders is that they will be looking closely at your:
- Genuine savings (money you have accumulated in your bank account that will go towards your deposit)
- Employment status
- Credit history
Getting pre-approved for a loan before you go property shopping is good practice.
If you can show that you adequately satisfy all these requirements, you should have a good shot at securing a loan.
It’s also an excellent idea to get pre-approval from your bank first. Otherwise, you could end up being declined for a mortgage right after you’ve put down the holding deposit.
7. Should you get a property manager?
Did you know that 80% of property investors in Australia use a property manager?
Owners have all types of reasons for bringing a professional on board to manage their properties, but it boils down to these main reasons:
- Time savings. It’s worth it to pay a few hundred bucks for a property manager so that you can keep your full-time job instead of quitting to become a full-time self-managed owner.
- You are getting an expert to manage your properties. Property managers have local knowledge and can develop great ideas to increase your rental yield and capital growth.
- They are finding tenants. Property manager leasing services is a great way to find good tenants and get rid of a vacancy.
- They handle property maintenance for you, which is known to be a source of headache.
- They collect your rent and keep things running smoothly, so you don’t have to spend your mental bandwidth on your investment property.
“I usually recommend to my clients that they manage their first investment property themselves. There’s a good reason for this: It gives them a good insight into how much work property managers do to earn the relatively small fee they receive each week.”
Helen Collier-Kogtevs, Property Mentor & Founder of Real Wealth Australia
If you’re on the fence about whether you want to self-manage your property or hire a property manager, we’ve broken down the main pros and cons and when you should self-manage in our article about different types of property managers & self-managing compared.
If you have more questions about what property managers do, you can read our ultimate guide to property management.
8. Are you prepared for the unexpected?
It’s an inconvenient truth, but at the end of the day, you can’t escape the fact that buying your first investment property in Australia is a risky business.
Many things can rear their ugly head and bring with them some hefty, unexpected costs.
Vacancies, bad tenants, property damage, and decreased property value from market downturns are just some of the unfortunate events that can hit your wallet hard.
Because of this, we have a financial buffer essential. Between two to four months of your rental income should be a safe amount.
9. Do you know your legal obligations?
If you want to avoid any potential legal mishaps, it’s a good idea to familiarise yourself with the landlord-tenant laws.
As an owner, you have many responsibilities to your tenant, ranging from preparing the tenancy agreement and supplying an entry report to maintenance and eviction. So, staying on top of these things is a necessity!