1. Starting without a strategy.
The single biggest mistake investors make is to simply launch themselves into an investment property without taking the time to work out what their goals are, and how they are going to achieve them. You need a game plan. This involves making a detailed analysis of your current income and tax position, as well as your plans for the future. Investment property then becomes the vehicle to get you where you plan to be. No architect would start building a house without blueprints, and no engineer would start on a bridge without extensive planning. You have to be well prepared before you start.
2. Buying property on emotion.
You have to invest using your head, not your heart. Investment property is a rational process. It involves property types, locations, affordability, and the economic drivers of area growth. It’s not a good idea to invest around the corner from where you live so you can “Keep an eye on it.” Nor is it a good idea to buy a holiday house that you plan to rent out from time to time. You have to be analytical, and coolly rational.
3. Choosing the wrong location.
The property market moves in waves across cities and states, and these waves don’t usually move in unison. Choosing the right location requires detailed research. As they say, “You have to do your homework.” Capital growth and good rental yields are what you are looking for. Selecting a property in a location that will deliver this is no accident, and they are usually close to schools, infrastructure, transport links and other public amenities. The good news is that the payoff is great when you put in the hard yards in terms of getting the location right.
4. Getting the financing wrong.
There are many pitfalls for the unwary. Like using the same bank that finances your home mortgage, paying too large a deposit, and underestimating the cashflow requirements in the early years. Over-optimistic budgeting, for example failing to provide for any period of vacancy or not keeping accurate records, meaning that you miss out on crucial tax benefits are also traps that first time investors can fall into.
5. Selling too soon.
Some investors enter the market with unrealistic expectations and are looking to make a killing in a few years. When this doesn’t happen they sell and move on, wasting huge amounts of money on transaction costs and fees in the process. A typical property cycle is 7 to 10 years, so ideally you should plan to go through several of these cycles to get the best long-term returns.
6. Trying to self-manage the property.
The amount of skill and experience needed for successful property management should not be under-estimated. This is a field best left to the professionals, and when investors try to manage their properties themselves, it often ends in tears. The process of getting the right tenants, minimising vacancies, and ensuring that the property is well looked after and well maintained, is a worthwhile expense when you consider the value of the asset under management.
7. Choosing the wrong agent.
A cheap rate from a property manager will simply result in a poor level of service and ongoing frustration for the owner. As with so many things in life, “You get what you pay for.” A low rate usually means that the agent will attract too many clients and be unable to manage the volume. This could then lead to staff turnover and inexperienced people managing your property. Your property is valuable, and it produces income. You need to entrust it to the very best people available, and be prepared to pay the market rate or above to get the best results.