Last week I wrote an article about three sure-fire ways to lose money in property which got me thinking about the other ways I’ve seen investors get it wrong.
You see, the unfortunate truth is that most investors fail to reach the objective of financial independence.
Statistics show that half of those who get involved in property investment sell up in the first five years, and of those who remain in the game, less than 10% own more than two properties.
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As I’ve often said: property investment is simple but it’s not easy.
Now that’s not a play on words.
It means that there are proven systems and strategies that have helped create wealth through property for many Australians. However, too many investors do the wrong thing or get swayed by the promises of overnight success by those messages we keep getting in our inbox.
Last week I suggested you avoid buying off-the-plan properties or new homes in new estates and that trying to buy property with options is a smoke and mirrors game.
Now let’s look at another seven ways you could lose money in property if you’re not careful.
1. Not having a strategy or a plan
Most Australians spend more time planning their holidays than they do planning their financial future.
The problem is that if you don’t have a strategy it’s easy to get distracted by all the so-called “opportunities” that keep cropping up, many of which don’t work out as expected.
Just look at all the investors who bought off-the-plan or in what they hoped would be the next “hot spot”, only to see the value of their properties underperform.
My recommended strategy for financial independence is to build a substantial asset base over a 10 to 15 period by purchasing high growth properties and adding value to them through renovations or redevelopment.
Over the next years you add more properties to your portfolio as your cash flow and equity position allows. Then in time you slowly lower your loan to value ratio and start living off your property portfolio.
2. Not reviewing your property portfolio
Property investment is not a set and forget affair. To be successful you must treat your investments like a business and regularly review their performance.
Of course you can’t easily or cheaply “swap” properties or reweight your property portfolio like you would shares. But that doesn’t mean you shouldn’t regularly review your portfolio to see what you can do to improve or upgrade your properties.
When was the last time you checked to make sure you were getting the best rents or that your mortgage was appropriate for the current times?
Maybe it’s time to refinance against your increased equity and use the funds to buy further properties or maybe just to top up those financial buffers that you set aside for a rainy day?
To gain financial independence it’s important you own the type of properties that will allow you to take advantage of this new property cycle. Remember, over the next few years some properties will strongly outperform others.
If you own secondary properties or real estate in areas that are unlikely to benefit from strong capital growth, it may be worth selling up and replacing them with the type of property that will help you develop long-term financial independence.
3. Not managing your risks
Many investors don’t understand the risks associated with property investment and therefore don’t manage them correctly.
Smart investors don’t just buy properties; they buy time by having sufficient financial buffers in their lines of credit or offset account to not only cover their negative gearing and see them through the ups and downs of the property cycle.
Another way sophisticated investors protect their assets is to buy them in the correct ownership structures to legally minimise their tax and protect their assets. I have found that most wealthy people own nothing in their own names, but control their assets through companies or trusts.
And of course you must also protect yourself by having adequate income protection and life insurance.
4. Thinking you can do it all on your own
Because the property market is booming, some investors think they can buy almost any property and it will be a great investment.
Unfortunately this is far from the truth. In my opinion less than 5% of the properties on the market are investment grade properties and just like in the last cycle, many investors will lose out.
Don’t be afraid to ask for help, but make sure it’s from an adviser who has your best interest at heart and is paid by you; and not a salesman whose loyalties lie with his client – the vendor or developer.
Buying property is a complex process – if you’re the smartest person in your team you’re in trouble.
Of course I think a property investment strategist should be at the centre of your team coordinating the others – but then some would say I’m biased. However, I know that my team at Metropole Property Strategists have helped thousands of ordinary Australians create significant wealth through property.
5. Believing the get-rich-quick seminars
I’ve found some investors look for that one big deal that will make them rich overnight. Others try to make money by tradingproperties.
Unfortunately the ‘buy, renovate and sell’ strategy you learn from programs like The Block doesn’t work in real life when you have to pay tradesmen, tax and interest.
Remember Warren Buffett’s great quote: “Wealth is the transfer of money from the impatient to the patient.”
6. Not doing sufficient due diligence and groundwork
Even though some of our capital city property markets are booming, that doesn’t mean you can afford to buy just any property or pay any price. This year the market won’t cover up those types of mistakes.
Not doing your homework can cost you a lot of money. So can falling in love with aproperty for all the wrong reasons.
As an investor, the only good reasons for falling in love with a property are: the numbers; that it fits your plan; it has more upside potential than issues; and it will help you meet your goals.
Don’t let emotion drive your decision. That’s what home buyers do, not real estate investors.
7. Buying the wrong property
While almost every property increases in value over time, some rise in value significantly more than others.
To build financial freedom you need to own the right type of property – one that grows in value sufficiently to enable you borrow against your increased equity giving you the funds to purchase further properties.
However, when you ask investors why they purchased their property they’ll say things like: it was close to where they live, close to where they holiday or close to where they want to retire. These are all emotional reasons for buying property, and while that’s the way people buy their homes, it’s not the right way to buy an investment property.
Instead I suggest my 4 Stranded Strategic Approach to selecting a top performing investment property:
- I buy a property below its intrinsic value – that’s why I avoid new and off the plan properties which come at a premium price.
- In an area that has a long history of strong capital growth and that will continue to outperform the averages because of the demographics in the area. This will be an area where more owner occupiers will want to live because of lifestyle choices and one where the locals will be prepared to, and can afford to, pay a premium price to live.
- I look for a property with a twist – something unique, or special, or different or scarce about the property, and finally
- A property where I can manufacture capital growth through refurbishment, renovations or redevelopment.
To help make 2014 your best year ever in property become financially fluent by learning from other’s mistakes rather than your own.
Michael Yardney is a director of Metropole Property Strategists, a company which creates wealth for its clients through independent, unbiased property advice and advocacy.