There are numerous mistakes investors make, which can be avoided, I would like to focus on the 5 most common and topical mistakes that many investor make and how to avoid them.
1. LENDING MISTAKE
Having a principle and interest loan (P/I) on for the loan on your investment property. Investment debt is tax deductable debt. Why reduce good debt (i.e. debt that saves you money (tax) that currently goes to the Government?) If you have a home loan then it is best to focus your available money on reducing this, therefore increasing your equity which could then be used toward an investment property, consider having an interest only (I/O) on your investment property loans. Likewise it is better to have an offset than a Line of Credit for your investment loan, this helps avoid muddying the waters with any redraw you have. If the balance goes up and down which it will it will affect your tax deductibility and lead to some problematic tax consequences.
2. HIGH PURCHASE PRICE
Buying a one million dollar property. Borrowing under 500k (unless it is a dual occupancy property) is generally considered better as there are more buyers at this level, you are spreading your risk by not putting all your buying power in the one property. If the property is vacant, the other could be rented, spreading your risk and lowering your holding costs. 2 x $500k properties will earn you more than 1 x $1million property usually. Therefore, you reduce your exposure to the same debt that you would be exposed to, if you borrowed for a $1million property.
3. OVERLY NEGATIVE GEARING
Many investors cannot afford to move beyond one or two properties typically due to the effect on their lifestyle and also the negative impact on their ability to borrow more money by buying wrong. A property may only cost between $50-100 a week, so it is important you know for sure they have this surplus available. It is like a savings plan for the future, spending $50 a week to own a 400k property which is growing in value. (The power of leverage) which makes it better than shares. Some investors end up more negatively geared than planned, often due to dealing with property spruikers, the modelled costs or income may not be accurate or included such as body corporate if any, rates, agent’s fees, insurance and maintenance allowance. Ownership on title can improve your holding costs as can a quantity surveyor report.
4. LACK OF DUE DILIGENCE
Lack of research; busy roads, power lines, industrial areas, or social welfare-housing neighbourhoods can negatively impact your property. Buying the wrong type of dwelling for the area can lead to higher vacancy rates. Many people have been led into buying Off the Plan apartments in Docklands and Southbank but have not been informed of the catastrophic supply versus demand problem. It’s always a good time to buy, it is just a matter of where and what. Deal with someone representing you not the seller, i.e. a property advisor.
5. NOT PLANNING
Waiting for the perfect property, and then waking up to find you’re sixty-five, and have done nothing. Some people overly compensate for this at some point by rushing in, listening to friends or family maybe. You may not ever locate the perfect property, it is wise to do something rather than nothing, but something based on facts and figures, not innuendo and hearsay. You need to plan ahead, start with the end in mind and work backwards. Seek the right advice, determine your goals, risk appetite, and strategies.
ABOUT THE AUTHOR: Andrew Crossley is a property investment advisor and property advocate and the founder of Australian property Advisory Group, specialising in representing the buyer not the seller. He is also the author of the #1 International Amazon Best Seller ‘Property Investing Made Simple’ comprising of the 7 key tips to reducing property investment risk and create real wealth. (Busybird Publishing, $24.95). For more information visit www.australianpropertyadvisorygroup.com.au or contact email@example.com