Some aspiring property investors think jumping into the property market is a surefire way to get rich.
Yes, property investment can build wealth, but it can go wrong if you don’t take the right approach. Here are five common mistakes rookie investors make.
Refusing to look outside your suburb or city
Buying properties in your suburb or city is convenient. You’ll be nearby should contractors need you during renovations or if any problems arise with tenants. However, having tunnel-vision can be a stumbling block.
Looking outside your immediate neighbourhood can yield some gems.
Where you buy should be determined by your investment strategy. Do you want to rent out the property or flip it? If you plan to rent it, the location will determine how much rent you can charge. Do you want to focus on affluent areas, city apartments or large suburban family homes? To find the right property, you may need to scout a little further.
Buying based on emotion rather than financial facts
Buying a property as an investment is not the same as buying the home of your dreams. You don’t have to love everything about the house. Seasoned property investors are all about the numbers. When they assess a property, they think with their head, not their heart.
What’s the market value? Is the property in a good location, near public transport, schools and parks?
If you’re flipping, will you make a large enough profit once renovation costs, transaction costs and holding costs have been accounted for?
Crunch the numbers to find out if it’s a worthwhile buy.
Trying to ‘time the market’
New investors often think it’s smart to wait until the housing market dips before buying property. But it’s almost impossible to time the market correctly. If the market is rising, how long will you have to wait until it starts falling? And if it’s currently falling, how will you know when the market has hit the bottom?
That’s why seasoned property investors talk about ‘time in the market’ rather than ‘timing the market’. If you buy a quality property and hold it for the long-term, it’s likely your property will enjoy significant capital growth, irrespective of what market conditions were like at the time of purchase.
Investment markets are always going to be unpredictable. Unexpected events can disrupt markets at any time. The good news is Australia’s economy is resilient and the property market has a history of bouncing back.
Not having a buffer fund
Property investing is a business like any other, with income and expenses. That’s why you need to understand your cash flow – all the money you’ve got coming in (both from your property and your job) and all the money that’s flowing out (including your mortgage repayments, property management fees, maintenance costs and living expenses).
If you’ve got a ‘rainy day’ fund, it means you can keep paying your mortgage even if your income falls (maybe because you lose your job or your tenants leave) or your expenses rise (maybe because interest rates go up or you get hit with a big maintenance bill).
Expecting a quick return on investment
Property investing can produce significant gains over the long-term, but rarely delivers significant gains over the short-term.
One reason it’s hard to make money in the short-term is because you have to pay transaction costs, such as stamp duty and conveyancing.
But if you buy a quality property and hold it over the long-term, the year-on-year capital growth is likely to significantly outweigh the initial upfront costs, as well as your ongoing mortgage repayments.