Last week I wrote a blog about four surefire ways to lose money in property and it must have struck a chord as tens of thousands of investors read it and many emailed me asking further questions.
This 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.
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 secondary established properties, not to buy 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 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 mining or regional “hot spot”, only to see the value of their properties underperform.
Today the new “hot opportunity” is buying properties in the USA.
You don’t have to look too far back to see the terrible results obtained by Australian investors who were lured by the temptation to buy USA properties because they were cheaper than a second hand car a few years ago. The same happened after the GFC and then again a few years before the GFC.
In fact, the landscape is littered with casualties of investors who’ve chased the latest fad.
My recommended strategy for financial independence is, over a 10 to 15 year period, to build a substantial asset base by purchasing high growth, well-located capital city properties and adding value to them through renovations or redevelopment.
You buy one and then over the 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 now, with our low interest rates is a good time for you 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?
And unfortunately sometimes you have to make the tough decision and sell a dud property.
To gain financial independence, it’s important you own the type of properties that will allow you to take advantage of this new phase of the 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 minimize 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 has been strong over the last few years, 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 1% 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 advisor 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 my team at Metropole Property Strategists have helped thousands of ordinary Australians create significant wealth through property.)
5. Believing the get-rich-quick seminars…
You know, the typethat say it’s easy to become a multi-millionaire overnight with real estate.
I’ve found some investors look for that one big deal that will make them rich overnight. Others try to make money by trading properties.
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 Buffet’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 growing strongly, that doesn’t mean you can afford to buy just any property or pay any price.
With a number of years of lower capital growth ahead of us, 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 a property 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 strategic 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 to 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.
To ensure I buy a property that will outperform the market averages I use a 5 Stranded Strategic Approach:
- I buy properties that would appeal to owner occupiers. Not that I plan to sell my property, but because owner occupiers will buy similar properties pushing up local real estate values. This will be particularly important in the years ahead when the percentage of investors in the market is likely to diminish.
- I would buy a property below its intrinsic value – that’s why I avoid new and off the plan properties that 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 because they have higher disposable incomes. In general these are the more affluent inner and middle ring suburbs of our big capital cities
- I would look for a property with a twist – something unique, or special, different or scarce about the property, and finally
- I would buy a property where I can manufacture capital growth through refurbishment, renovations or redevelopment rather than waiting for the market to deliver me capital growth.
Make 2015 your best year ever in property. I’ll give you my insights into how best to take advantage of the opportunities ahead in a series of one-day training seminars I’m conducting with a faculty of highly experienced and unbiased advisers around Australia in March and April. Please click here and get full details of my National Property Market and Economic Updates and reserve your place to join me.