The five most common property investment mistakes and how to avoid them
When it comes to purchasing an investment property, it is vital to seek professional advice and be well informed and educated making a big decision of your life. But, it is just as important to do your own research side by side. Sometimes due to lack of information and improper guidance it becomes a concern as some investors give away their purchasing power by making ill-formed and unstructured decisions. I’ve had heaps of clients who have bought property themselves without professional guidance and with no due diligence and now their properties are worth less and are underperforming. It is of high significance to avoid the following issues and mistakes by seeking right property investment advice from concerned professional and review the investment strategy on time to time basis:
1. Poor Financial Structures:
This includes investors taking interest-only loans without a safety buffer or borrowing the maximum amount to get the into the market which can serve as a “personal financial disaster”. It is less common, but I have seen people buying assets in the wrong entity, such as using their personal name instead of a trust to protect personal assets. People setting up financial structures that are not congruent to their personal situations. Other is issue of cross-securitisation: resulting in banks taking security across all the investor’s assets. This can result into a dangerous situation at unexpected financial distress for the investor. Next, some people have multiple properties tied up with the same lender and they can’t sell without the bank’s permission. It is highly recommended to use different lenders for different properties to keep things separate as much as possible and have least cross collateralization.
2. Lack of sound research and due diligence:
‘Mum & Dad’ investors and busy professionals using inexperienced investment companies and not cross-checking research can result in hazardous situation specially for First time investors. I am strong advocate of using professional services of experienced professional even at a higher cost to get the sound advice and using brain to evaluate and cross verify the information again before taking a big decision.
I usually recommend investor to cross verify the contracts with the property lawyer and have them attestation to protect self from any doubtful situation.
3. Using emotions to make decisions
A common mistake made by many investors is to be trying to buy a property for its lifestyle benefits rather than its fundamentals. Using a holiday home as an investment property doesn’t work in long run and defeats the objective of investment. Holiday home often has poor yields, poor capital growth and requires a lot of maintenance. Investment property should not be having strings attached to it. It should be bought just a vehicle for wealth creation through cash flow and capital. Irrespective of the proximity to the investors. As investor should not be having intentions to living in their investment property and use it for cash flow purchase and at the location with good rental and higher capital growth.
4. Over-borrowing and safety buffers
Over borrowing can be financial suicidal at the time of market volatility period. It can serve as the dangerous maneuverer during economy lapse. Although, it wasn’t uncommon for investors who own multiple properties. This could also lead to difficulties in refinancing if an investor has borrowed to their limit particularly considering the tightening in the lending restriction. Thus, it is important to understand that over borrowing will not do much of good but leads you to a financial hazardous situation.
5. Lack of strategic planning
Strategic planning serves as a vital component of a wealth creation journey. Strategic planning needs to be reviewed with the changes in the market conditions and government regulations. I came across heaps of investor who losing opportunity to create cash flow at their 80s and living a mediocre lifestyle when they could afford a financial stress-free life by making smart strategic decisions with their properties. Some investors consider investment properties as a security for their kids to good tertiary school and some consider it to source of financial freedom at retirement. Either way investment serves as a long-term planning medium. Thus, investing at the right time and right place with professional guidance becomes a vital component of the investing journey.