19 Jul 2015
Property investment has always been popular in Australia. However, like all forms of investment, there are loads of variables involved and it’s easy to make expensive mistakes. Building wealth through property investment can be a lot of work – particularly if you’re new to property investment and are not aware of exactly what’s required. In this article, we outline some of the common mistakes made by first time property investors so you can plan ahead to avoid them.
Not doing your homework
Many people make the mistake of buying a property simply because they like it, or think it is a bargain. But not every property makes a good investment. When you find a property that you might like to purchase, it is very important that you do your research to ensure it will give you the return on your investment that you will need. Ask yourself these questions, and importantly, take the time to research the answers carefully:
• Will it be easy to find tenants/will the property be in high demand?
• What rental income can I expect?
• Does the property have strong capital growth potential? Is it in a growth suburb?
• Am I paying the right price? How long will I have to hold the property before I can make a profit by selling it?
Not factoring in all of the costs
Cash-flow is a very important factor when you plan to invest in property – and it’s the area where many first-time investors come undone. It’s not only important to factor in all the costs of buying the property, you must also factor in all the costs of running the investment and maintaining it from the outset.
When you research the rental income you can expect from a property, you will first need to know exactly how much rental income you will need to cover the costs of holding it. The actual costs will vary from property to property – if you purchase a new home, for example, you will not need to factor in much by way of maintenance costs at first. But if you purchase an older property, you will need to make an estimate of what work is going to be needed and when, and how much this will cost and factor that into the budget.
Ask yourself these questions:
• Will the rental income be enough to cover the costs of a property manager, advertising for tenants, regular general maintenance, council rates, building insurance and landlord’s insurance?
• How will I cover the costs of large repairs – say if the hot water system needs replacing quickly?
• How will I cover the costs when the property is untenanted and there is no rental income? How long is the average vacancy time in this area? How long will I have to budget for?
Not getting the property management right
A property manager is the liaison between you as the landlord, and your tenant. First time investors often believe that managing their own property will save them money. However, it should be remembered that your property management costs are usually tax deductible and few people have the skills to not only find tenants quickly, but choose the right ones.
Property managers find your tenants, vet them by performing credit checks and then collect the rent every month. They deal with tenant requests, organise regular maintenance and pursue action when disputes arise. They keep track of rents in your area and make sure your rent keeps pace with the market.
In short, a good property manager will help you maximise the return on your investment and save you from many sleepless nights. However, some property managers are better than others, and fees vary. You should carefully research your property manager before engaging them – ask around, check references and make sure they have the resources to do a good job. If you need help with this, ask us for a referral.
Not talking to a tax professional
Did you know that you should obtain a depreciation schedule as soon as you purchase the investment property, preferably at settlement? Not many people do. It’s a document that helps your accountant determine how much you can claim back on tax each year.
One of the major mistakes people make with investment property is not planning ahead to make the most of their tax deductions. In order to ensure you understand what you can and cannot claim, you need to talk to a tax professional and/or accountant early on in the process. Getting it right will help to ensure you come out ahead and enjoy substantial savings. Getting it wrong will cost you money you may never get back. We have many expert contacts in this area so if you need a quality referral to an accountant, please get in touch.
Getting the finance wrong
Before you commence your property investment journey, it is wise to make a plan about what you want to achieve – your financial goals for the future. We recommend you sit down and talk to us about getting the right financing to achieve these goals. Taking a haphazard approach to financing your first, and then subsequent investments, could cost you more money, limit the amount of investment properties you can acquire and even be a recipe for disaster if something goes wrong.
We can’t stress enough how important it is to formulate a plan before you begin, and talk to us about your financing before you even consider making a property purchase. We will help you set up the financing arrangement that is most advantageous to you – considering your goals and your personal financial circumstances.
If you’re thinking about making a property investment, why not talk to us? We are happy to take the time to discuss your plans, get you pre-approval for your financing and introduce you to a team of other professionals who can help you to avoid these expensive mistakes above! Give us a call – we’re here to help.