Five common mistakes property investors make

Five common mistakes property investors make

Low interest rates and flat or falling house prices in the past few years, combined with rising rents, have provided a healthy income boost for property investors, research shows. But, while anyone can become a property investor, not everyone can be successful.

Experts say becoming a successful property investor takes time, a lot of research and a willingness to act. So if you harbour dreams of getting rich quick, you might need to rethink your approach. And before you apply for your first mortgage as a property investor, take the time to consider the most common mistakes to avoid.

1. Not doing your homework

Just like buying a property to live in, buying an investment property requires a lot of research, if not more. Attempting to bypass this crucial step in the process is where many would-be buyers go wrong, often choosing to buy in an area they would like to live or becoming emotionally involved in the purchase.

The key to success is researching and comparing sale and rental prices in a number of suburbs, rental vacancies, capital growth trends in those areas, as well as comparing home loans, according to the experts.

Investment property expert Chris Gray, author of The Effortless Empire, said a successful property investor will be prepared to view several properties to find the one that will deliver the steadiest income.

“Instead of seeing one hundred properties, some investors will only see five,” he said.

2. Waiting for the right time

While you wait for the stars to align – and they never will – the market will leave you behind, prices could rise and you could sacrificed time on the market, says Gray.

“Everyone’s trying to wait for the best time to buy a property investment – with the highest capital growth, lowest interest rates, cheapest properties, stability in the market,” he said. “You’re never going to pick the peaks and troughs of the market.”

“As an investor, I buy when I have the money to buy.”

3. Predicting the next hot suburb

“Up-and-coming” suburbs may fail to achieve the returns you need for a successful property portfolio and could end up losing money, says Gray. So rather than attempting to pick the next “hot” suburb, stick to areas that have proven their staying power time and again.

“Where there’s high return, there’s high risk,” Gray advised. “As a long-term investor, I buy in inner city areas around Sydney, Melbourne, Brisbane and Perth. I might not double my money but I will get 10 percent return every year guaranteed.”

4. Concentrating on saving money

As the old adage goes, you have to spend money to make money. Whether that’s on an investment course to provide you with the know-how for a smooth transition into property investment, or valuation and building reports to ensure the property you buy won’t cost you money due to a leaky roof or rising damp, don’t be reticent when it comes to initial outlays.

5. Not having enough cash reserves

Before you jump onto the property investment ladder, you must ensure you have enough cash reserves to cover costs such as council rates, insurance and other fees if you find yourself without tenants. Rising interest rates can hurt if you’ve not planned ahead too, so consider budgeting for interest rates 2 percent higher than you’re likely to be paying if you bought at today’s low rates.

Better yet, follow the experts’ advice and calculate all likely costs before you buy and factor in a 10 percent margin for unexpected expenses. Your property investment career will come to a quick end if you run into financial troubles and are forced to sell.

Did you find this helpful? Why not share this article?

Advertisement

RateCity

Money Health Newsletter

Subscribe for news, tips and expert opinions to help you make smarter financial decisions

By signing up, you agree to the ratecity.com.au Privacy & Cookies Policy and Terms of Use, Disclaimer & Privacy Policy

Advertisement

Learn more about home loans

What is bridging finance?

A loan of shorter duration taken to buy a new property before a borrower sells an existing property, usually taken to cover the financial gap that occurs while buying a new property without first selling an older one.

Usually, these loans have higher interest rates and a shorter repayment duration.

What is an investment loan?

An investment loan is a home loan that is taken out to purchase a property purely for investment purposes. This means that the purchaser will not be living in the property but will instead rent it out or simply retain it for purposes of capital growth.

Mortgage Calculator, Property Value

An estimate of how much your desired property is worth. 

What is a line of credit?

A line of credit, also known as a home equity loan, is a type of mortgage that allows you to borrow money using the equity in your property.

Equity is the value of your property, less any outstanding debt against it. For example, if you have a $500,000 property and a $300,000 mortgage against the property, then you have $200,000 equity. This is the portion of the property that you actually own.

This type of loan is a flexible mortgage that allows you to draw on funds when you need them, similar to a credit card.

What does pre-approval' mean?

Pre-approval for a home loan is an agreement between you and your lender that, subject to certain conditions, you will be able to borrow a set amount when you find the property you want to buy. This approach is useful if you are in the early stages of surveying the property market and need to know how much money you can spend to help guide your search.

It is also useful when you are heading into an auction and want to be able to bid with confidence. Once you have found the property you want to buy you will need to receive formal approval from your bank.

What is equity and home equity?

The percentage of a property effectively ‘owned’ by the borrower, equity is calculated by subtracting the amount currently owing on a mortgage from the property’s current value. As you pay back your mortgage’s principal, your home equity increases. Equity can be affected by changes in market value or improvements to your property.

Why was Real Time Ratings developed?

Real Time RatingsTM was developed to save people time and money. A home loan is one of the biggest financial decisions you will ever make – and one of the most complicated. Real Time RatingsTM is designed to help you find the right loan. Until now, there has been no place borrowers can benchmark the latest rates and offers when they hit the market. Rates change all the time now and new offers hit the market almost daily, we saw the need for a way to compare these new deals against the rest of the market and make a more informed decision.

What is stamp duty?

Stamp duty is the tax that must be paid when purchasing a property in Australia.

It is calculated by the state government based on the selling price of the property. These charges may differ for first homebuyers. You can calculate the stamp duty for your property using our stamp duty calculator.

What is an interest-only loan? How do I work out interest-only loan repayments?

An ‘interest-only’ loan is a loan where the borrower is only required to pay back the interest on the loan. Typically, banks will only let lenders do this for a fixed period of time – often five years – however some lenders will be happy to extend this.

Interest-only loans are popular with investors who aren’t keen on putting a lot of capital into their investment property. It is also a handy feature for people who need to reduce their mortgage repayments for a short period of time while they are travelling overseas, or taking time off to look after a new family member, for example.

While moving on to interest-only will make your monthly repayments cheaper, ultimately, you will end up paying your bank thousands of dollars extra in interest to make up for the time where you weren’t paying off the principal.

What is appreciation or depreciation of property?

The increase or decrease in the value of a property due to factors including inflation, demand and political stability.

What is a draw down?

The transfer of money from a lending institution to a borrower. In a typical home loan, the funds are drawn down all at once in order to buy the property. In a construction loan, the money is drawn down in several stages to pay the builders as they progress through each phase of the project. In a line of credit loan, you can draw down money up to a limit based on your loan’s available equity.

What is the best interest rate for a mortgage?

The fastest way to find out what the lowest interest rates on the market are is to use a comparison website.

While a low interest rate is highly preferable, it is not the only factor that will determine whether a particular loan is right for you.

Loans with low interest rates can often include hidden catches, such as high fees or a period of low rates which jumps up after the introductory period has ended.

To work out the best value for money, have a look at a loan’s comparison rate and read the fine print to get across all the fees and charges that you could be theoretically charged over the life of the loan.

What is equity? How can I use equity in my home loan?

Equity refers to the difference between what your property is worth and how much you owe on it. Essentially, it is the amount you have repaid on your home loan to date, although if your property has gone up in value it can sometimes be a lot more.

You can use the equity in your home loan to finance renovations on your existing property or as a deposit on an investment property. It can also be accessed for other investment opportunities or smaller purchases, such as a car or holiday, using a redraw facility.

Once you are over 65 you can even use the equity in your home loan as a source of income by taking out a reverse mortgage. This will let you access the equity in your loan in the form of regular payments which will be paid back to the bank following your death by selling your property. But like all financial products, it’s best to seek professional advice before you sign on the dotted line.

Does Australia have no cost refinancing?

No Cost Refinancing is an option available in the US where the lender or broker covers your switching costs, such as appraisal fees and settlement costs. Unfortunately, no cost refinancing isn’t available in Australia.