The Top 10 Mistakes
Most Property Investors Make

A lot of people make the same basic mistakes when they start out in property investing and as a result get poor returns on their investment. They then often turn their back on property investing...



In itself, property investing is not difficult, in fact it is a pretty simple process. Follow the rules, and you will not have any major problems, but here is what not to do:

1. Thinking Like a Consumer
2. Poor Head for Numbers
3. Waiting For The "Right Time To Invest"
4. Poor or No Research
5. Tomorrow’s market is not today’s
6. Buying on Emotion
7. Financing Errors
8. Inadequate Taxation Advice
9. No Exit Strategy
10. Selling Too Soon
   

1. Thinking Like a Consumer

Consumers are impulse buyers. If the cash is there or worse still, the Credit Card has available funds; any whim will be satisfied by an impulse purchase. Consumers have little concept of the "no gain without pain" maxim. They are conditioned to instant gratification, and therefore the planning required for a long-term investment strategy is never contemplated.

Consumers believe most of what the media tell them. So if the media is running stories about how property prices are booming, consumers run out and buy an investment property, generally close to home so they can keep an eye on it. But they tend to wait a few years to make sure the media is telling the truth, positioning their investment at the end of the current growth cycle. If the media are running stories about property prices depressing, consumers sell their investment properties and buy shares, top up their Superannuation, or worse, they put the money in the Bank. But they do this as soon as the first stories about the pending crash hit the press.

Consumers are scared of debt (unless it is their own home Mortgage, Credit Card debt or a Lease for their new toy). The concept of productive debt leveraging a growing asset class is completely foreign to them.

Consumers believe that Taxation benefits will make them rich, and make investment decisions based primarily on Taxation benefits. Consumers believe the fastest way to wealth and happiness is to pay off their Mortgage as fast as possible, because that is what the media tells them is the best way to beat the "warlord" Banks. Consumers believe that owning their own home is the way to maximise their wealth in life, because that is what conventional wisdom teaches them. So much so that when the Government changes the First Home Owners Grant from $7,000 to $14,000 as they did in 2001, a boom in real estate sales is fuelled that marches prices in the worst suburbs forward like never before, creating their own Investing nightmare when the Gravy Train leaves the station and the bubble bursts.

Consumers believe that borrowing 100% of the value of their new home (because they have no savings) is the only way they can become rich in the long run, completely ignoring the fact that the unproductive mortgage interest from this high gearing will cripple their cash flow.

Consumers believe that people that invest aggressively are rich and that rich people earn so much money that they have no idea how the average working class lives from day to day.

Consumers believe their 9% company Superannuation contributions (and possibly a little more every now and then) will more than adequately provide them with enough income to maintain their current lifestyle when they retire. 
 
What is the remedy?
 
Plan and strategise, based on your own needs. Use the most amazing organ in our body called the brain (the only differentiating feature between us and the animals of the world), and challenge everything that the "common" wisdom leads you into. Accept nothing on face value. Research everything, and know the indisputable facts that give you the base line knowledge on any subject that is of interest to you.

We are in the Age of Information.

Never before in the history of mankind have we had available such volumes of the written and spoken word for free and at the touch of a mouse button, just waiting for the intrigued consumer ready to make the decision of his/her life to become an INFORMED consumer, and then the natural progression to INVESTOR.

The mind of a professional investor requires discipline and self-control. Professional investors use all available information and modern technological tools to maximise their returns and minimise their downside risk.
 
It was Albert Einstein that said: "The definition of insanity is doing what you have always done and expecting a different result"
 

2. Poor Head for Numbers

Most potential investors do not have a benchmark in their minds to test the viability of an investment quickly. This leads to potential problems with overpaying for an investment, or undercharging rental. At best, it leads to a lot of wasted time on non-productive due diligence research when the time can be better spent.

Here is a quick "rule of thumb" to help you quickly assess viability.

The 5% rule is really useful in assessing a property quickly. You know that a $500,000 property rented at $500 per week represents a gross rental yield of 5%. So $300,000 at $300pw also represents 5% rental yield. Equally simple to work out are fractions of the base 5%.

So if a $400,000 property is bringing $200pw, you know the gross yield is 2.5%. If it is bringing $600pw in rent, it has a rental yield of 7.5%. Likewise if a property is renting for $350pw, and the rental yields in the area are around 4%, the property will be worth around $400-$420,000 to you as an investor.

Using the base 5% Rule, you can quickly calculate any property viability on your feet with no calculator or sophisticated software.
Likewise, you need to have an appreciation for annual running expenses other than loan interest. When you take into consideration all fixed annual costs, a house and land will consume around 30% of your rental income, providing you are utilising a professional property manager. If you buy a property in a Body Corporate, your expenses may rise to up to 55% depending on the BC Fees. So if you want to buy a lower priced Strata Titled property, you will have a very large negative gearing component that will probably never correct itself. Urgh!!

You would want to be very sure you are experiencing exceptional capital growth to wear that constant reminder of a mistake is assessment.

Develop these skills and you will save an awful lot of time and effort, and save you from making some mistakes.
 

3. Waiting For The "Right Time To Invest"

Maybe not a surprise, but this is a very common mistake indeed. History shows that the Australian property market goes through cycles which last 7 to 12 years. Sometime in that cycle property will be at its peak, but trying to identify the bottoms and the peaks is very difficult and since the cycle last that long there are plenty of years that still represent good buying opportunities. Remember, after this cycle there is like to be another one.
 
Real estate author Jan Somers says: "There is so much to be learned from these people who have been investing in property for a long time. One thing they all tell you is: if you wait for the right time to buy, you’ll never buy anything at all. And if you sell when everyone says sell, you’ll never have anything at all. The trick is to buy whenever you can afford to. In other words, buy when it suits you financially, not when it’s economically correct."
 
Fred Johnson, author of the "Wealth Power of Property" has this to say about waiting for the right time to invest: "Consistently throughout the past 45 years, people have been telling me that it’s not a good time to invest in property. In the early 50s when a home loan was as rare as hens’teeth, they said – it’s not a good time to buy; there is no money available; prices will not rise. In the late 50s when exports were flagging, they said the economy was heading for disaster: don’t buy property, interest rates were going up, import quotas were being cut and world prices for wool and wheat had dropped.”
 
“The Menzies credit squeeze of 1961 was a good reason not to buy property. Drying up of credit; lack of confidence in the economy. The doomsayers said property as an investment was finished and would never return to its old glory. In the late 60s, Great Britain, our biggest export customer, was negotiating to join the EEC. Menzies raced to London to point out the error of their ways. He was unsuccessful and proclaimed that Great Britain’s entry to the EEC would make previous recessions look like a boom. Don’t invest in property now, they said.
 
"The early 70s saw low inflation. Property would not increase in value, they said. Then in the mid 70s, there was high inflation, high unemployment and then recession. The OPEC oil crisis of the late 70s caused the "experts" to say that property prices would drop as people and industry could not survive the expansion of our cities as oil prices soared. Property was out of fashion once again.”
 
"The abolition of negative gearing in the mid 80s had people saying – don’t buy property now, there’s no tax advantages. In the early 90s we had another recession and low inflation with a flood of headlines such as "values cannot rise when inflation is low".
 
Consistently for the past 45 years, "experts" have been saying that the time is not right to invest in property. Assuming you have done your own, independent research the biggest mistake you can make is not to own any investment property at all.
 
So the lesson from all this is it is not about timing the market, but time in the market. Invest wisely and be sure that you can afford to hold the property through at least one full cycle and you will do well.
 

4. Poor or No Research

Let’s be honest, there really is no excuse for not knowing how many properties where sold in the area you’re interested in, for what price and how they compare against the property you’re interested in. There are many services on the Internet that provide detailed reports of properties that have sold in the past three months, these include:
 
http://www.homepriceguide.com.au
http://www.rpdatareports.com.au
http://www.residex.com.au
 
Any of these reports will provide you with exactly the same information Registered Valuers use on behalf of your lender to asses the valuation of the property you intend to purchase. And keep in mind that information is key during negotiations. The more you know the better you can tune your offers and appropriate terms and conditions to the local environment.
 
Most local councils also have a lot of information on their websites relating to development plans, future potential property zoning changes etc. This information is vital for property investors and it’s free.
 
Talk local estate agents to get an idea of the market, what is on offer, what is in demand, how is the rental market, what developments are coming up. And don forget to use real estate websites like http://www.realestate.com.au or http://www.domain.com.au to see what else is on offer in the area and what the asking prices are for comparable properties. Go and have a look at some.
 
So really, there is no excuse except laziness for not doing your research and buying the wrong investment property.
 

5. Tomorrow’s market is not today’s

Every body has heard of "Location Location Location" being all important for real estate investors. However, Australia is changing and your investment strategy needs to change also. The Australian Bureau of Statistics is forecasting an upper-level population of 28.2 million, and a lower level of 24.1 million by 2051 (currently 19.4 million).
 
Net migration into Australia has been averaging around 100,000 people annually. If Australia’s population grew in the 21st Century at the same 1.65% per annum rate it grew in the 20 Century, by 2100 the population would be 100 million.
The three major states of NSW, Queensland and Victoria account for 77.5% of the population. Queensland is expected to overtake Victoria’s population around the end of the first quarter of this century. West Australia is forecast to have the fastest growth over the next 5 years at 2.3% per annum, while South Australia (and Tasmania) are expected to have little, if any, growth. NSW should continue at around 1.2%. Australian Society is not only ageing, but it is also becoming more diverse in attitude, behaviour and lifestyle, posing increasing challenges for investors.
Australia’s National Housing Strategy identified that household structures were changing as a result of ageing, lifestyles and ever increasing incomes.
One and two person households are increasing inexorably in Australia, and now represent more than half of all households. There are 1.5 million households in Australia with just one person.
Families are changing too. Couples with children represent just over a third of all households, but more than half the nation’s households have no children.
All data points to the continuing demand for smaller properties closer into the city. The younger generation is flocking to be closer to the city.
Many investors make the mistake of assuming that "the city" means the Central Business District (CBD) , when the inner area suburbs are in many cases more lively, affordable and popular. Many people are flocking to these trendy, "café style" suburbs near the CBD’s, as opposed to living right in the city centre.
Then there is the "ripple effect". As prices go up in one area, the adjoining area is the next to benefit. Just because one area had good growth last year, don’t assume it will have good growth next year. It may….. but it may make the adjoining area more affordable.
This applies city to city, as well as suburb to suburb. Don’t base your investment decision on somewhere you enjoyed on holidays, reasoning that because you liked it "others will to".
You must try to see what type of property tenants are demanding, what is the occupancy rate, and what are the future trends.
A studio apartment located in Sydney’s King Cross, may not be what "you would live in", but could well prove to be a better investment than a 3 bedroom home until in a middle distance suburb. Be careful of your own preconceived ideas of what people want.
 

6. Buying on Emotion

I alluded to this issue in the previous section. Bottom line is that no matter how much you love or hate a property, the investment dynamics of that property will not change.
Residential real estate is a commodity. Everyone has to live somewhere.
So the prices of residential real estate (both rental and sales) are based on the supply and demand dynamics within the market. If the demand for property exceeds supply, prices will be rising. If supply exceeds the demand for property, prices will be steady or falling.
This is subject to one major factor in residential real estate, and that is affordability.
When demand is exceeding supply to a large extent, it is likely that you are experiencing a boom in real estate sales prices. The only factor that holds this dynamic back is affordability. We all remember the last boom in Sydney prices that stopped in November 2003. Why did the market suddenly stop?
 
Two reasons:
1. The Federal Government withdrew the additional $7,000 first home owners grant; and
2. Average home owners could no longer afford the prices of Sydney real estate.
 
An emotional investor will not consider the current economic conditions in a given market. They tend to buy because the proposed investment is located close to their home, and they think it is a bargain. Whilst over time these investments may provide solid gains, the investor is often bound by poor capital gains in the initial years, thereby reducing their ability to leverage into other investment properties in the future.
Unemotional investors buy in whatever market is in a growth cycle. If Perth is growing, that is where their focus of attention will be. If Darwin is running, unemotional investors will be closely scrutinising the market. When Brisbane starts moving, unemotional investors buy there.
This means that at any given time, unemotional investors have property in a growth market, thereby maximising short to medium term growth and minimising downside risk. This is the holy grail of property investing.
The other major emotional problem to overcome is the fear of debt.
There is a HUGE difference between productive and unproductive debt.
Unproductive debt is any debt that services non-income producing assets, and is therefore not tax deductible. Your home loan, credit card debts, personal loans for consumer activities etc are all examples of non-productive debt.
Productive debt on the other hand services assets acquired for income production, and are generally appreciating assets.
You need to minimise unproductive debt, and maximise productive debt.
Let’s assume you purchase 3 Investment Properties in the next year worth $1mil, for which you borrow the whole purchase price. Now the thought of $1mil in debt to most Australians is enough to send the shivers down your spine. Now zoom forward 10 years, and the three properties are now worth $2mil. You have just made the easiest $1mil you will EVER make! Would that $1mil of debt seem like a big problem now? I think not!
The basic principle of property investing is the leverage you gain by having an income producing asset in your name with money provided by someone else.
So forget about the worries of debt! Replace that worry by the worry of not doing anything when you can easily afford it! Start thinking like an investor!
 
Research has shown that nearly 60 per cent of investors say they buy an investment property that "they could live in themselves". Nearly twenty percent of investors select a property on the basis of "they may move into it in the future", while only 8 per cent say they bought it to make a capital gain!
Yet historically Australian property in and around the capital cities has always moved up in value, giving investors capital growth. Yet 8% of investors went into the property with this in mind!
These statistics raise two important issues all investors need to be aware of. Many investors are buying emotionally. They are buying properties that they "could live in themselves".
Yet, they may be a professionals is their late 40’s, while their prospective tenants are young single yuppies. Buying a property they like, may not appeal to their future tenants.
Second, people invest because they love the property. They should invest because they love the prospects of the property achieving above average capital growth and rental income.
Are you buying for 3, 5 or a 20 year investment? Is your main aim high rental return, or capital growth?
 
 
 

7. Financing Errors

Many people try to pay off the mortgage as soon as possible, using spare cash to reduce their loan.
Whilst understandable, this is not always be the best strategy.
That extra money could be used for further investments. Paying it off quickly does not make good sense from an investment point of view.
Many people buy an investment property, rent it out, then put it away "in the top draw" for the future.
They only look at it again if it becomes empty or vacant for a long time!
However, a little simple tax planning and structuring of your investment can help ensure you never pay any tax on your rental income, and pay little or no capital gains tax if you sell.
If you are an expatriate, or you intend to reside and work in Australia in the future, you can structure your investment so that you arrange to accumulate tax losses for the future.
These can be carried forward indefinitely for the future, and can be used to greatly off-set any future income tax that you may incur upon your return to Australia.
The Capital Gains Tax laws and the personal income tax rates both changed recently, providing opportunities for investors to restructure themselves. Many investors get their financing wrong, find the property is costing them too much each month, so sell the property quickly, make little or no money, then say investing in Australian property is not for them, or "no good!"
Small differences in the financing can mean not only no monthly outlays, it can also mean that you may be able to purchase further properties, and can give you greater holding power.
Some key points to consider:-
Think about your long-term investment strategy to determine the type of mortgage to best suit your needs.
There are a number of questions you should be asking yourself before you commit to a certain types of mortgage. How long will you own this property? Will you always rent it out? Do you want to buy several properties, or even a portfolio? Or will this be your only investment property?
What direction are interest rates going in, and how quickly? Is your income expected to change (up-down) during the course of you holding this property?
The answers to these and other questions will help you determine the most appropriate mortgage you should be seeking.
Mortgage options these days are very flexible – there are principal and interest fixed and floating rate loans, redraw facilities, back-to-back loans, multi-currency options, flexible repayment investment loans, introductory rate loans, combination loans, all in one loans, standard variable loans and several others.
Rather than approaching numerous banks direct or talking to investment advisors, seriously consider dealing with an independent mortgage expert, who is dealing directly with the banks. Enlisting their services can make a significant difference in the cost and effectiveness of the mortgage you obtain. They can often make the process faster thereby avoiding costly delays. Typically, there is no cost to the borrower.
Also consider getting a preapproval, which these days is fast, easy and cheap. Mortgage Specialists can usually get you preapproval in just days, and you are then ready to move immediately on any outstanding opportunity.
Try to buy with as little as possible as the down payment (particularly when interest rates are low) as then you can take advantage of the massive benefits of leverage in a rising market.
Consider an "Investment Loan" instead of a standard principal and interest repayment vehicle.
 

8. Inadequate Taxation Advice

One of the primary reasons real estate investing is so prominent in the minds of potential investors is that the Federal Government has structured the Taxation Legislation to encourage property investing by allowing negative gearing of real estate investments. This strategy ensures there will always be a reasonable supply of property to those that cannot afford or choose not to buy their own home. It is a way of the Government subsidising the housing market to ensure the supply part of the equation, particularly for the less wealthy in the community.
Negative gearing means that any excess of expenses over the income of a property investment (including some very generous depreciation allowances) may be claimed against any personal income derived from other sources. This encourages property investors to maximise their borrowings (generally 100% of the property value PLUS purchasing costs) with the resultant shortfall from rental income becoming fully tax deductible from their primary income.
With this background, why is it that the great majority of Australians that invest in real estate never take professional advice from property taxation specialists BEFORE making their initial purchase?
It is beyond my understanding, but this is generally the case. For the sake of the cost of around $400-$600, the majority of property investors take no advice and potentially forgo thousands of dollars in future taxable income from Capital Gains by not seeking the correct advice as to the appropriate ownership structure.
Bottom line is, never take the advice from the salesperson as to what name you should buy the property when you are paying your deposit. All the salesperson wants is the deposit and the subsequent sale.
Always consult your professional property taxation specialist before you engage any sales opportunity to ensure you have the correct financial structures in place based on your own current circumstances to maximise your asset protection and legally minimise taxation today and in the future.
 
 

9. No Exit Strategy

There are 3 certain things in life: Death, Taxes and Change. Nothing ever stays the same. So whatever you do now, make sure you can always change tack in the future with minimum downside risk.
 
I am not a great believer in staying with an investment property that is underperforming in its market. Rarely can these situations be turned around without significant investment of time and money. The opportunities for improving investment outcomes are constantly abundant, so from an "opportunity cost" perspective, sitting with a "dud" does not make good business sense (the way that unemotional investors think).
By always purchasing in a market in a growth cycle, you can confidently minimise any downside risk if you are forced into a position where you must liquidate an investment property.
If you purchase in a market in a down cycle, no matter what price you pay for the property, liquidating it may be problematic if you are forced to sell.
So always buy in a market in a growth cycle, so you can always find a buyer that will generate a profit for you if you are forced to sell.
The other key factor to consider is always purchase properties in the middle of the affordability scale from a rental perspective. At the time of writing, the amount of rent an average wage earner can afford in Sydney is between $350-$400 per week. These properties will sell for around the $500,000 mark, so that should be your target price range for Sydney. In the inner suburbs, these prices are a little higher.
By ensuring your target price is within the average affordability ranges means that your possibility of poor tenants that do not pay their rent is minimised. Also, higher priced properties are much more difficult to sell or rent in times of economic decline, so by staying in the middle ground prices, you will minimise your downside risk by having the largest number of potential purchasers if you have to liquidate.
 

10. Selling Too Soon

This is one of the most common mistakes investors make. An Australian Bureau of Statistics survey from a few years ago revealed that over 30% of all investors sold within the first 5 years of ownership, with another 20% intending to "sell soon." So nearly 50% of all property investors will sell their investment property within the first 5 to say 7 years of ownership.  

Now as we have discussed, the property market moves in cycles, cycles of 7 - 12 years, and the longer you hold the more "cycles" you can benefit from. By holding for the long term you achieve growth and can ride out any downturns. You can "add value" by renovating and refurbishing when the property is older. As the value rises, you can refinance and buy further investments without outlaying any additional cash. By buying and holding, you avoid the substantial costs involved in buying and selling.  

By selling within 5 years, you don't benefit of even a single cycle.