The five mistakes every first time property investor should avoid

1. Buying new or off the plan properties

Many investors make the mistake of chasing depreciation benefits offered to new properties or stamp duty savings that are available in certain states when buying off the plan. Many forget about the cardinal rule in real estate investing: buying well and buying property at or below what it’s worth.

Most new properties are priced according to developer’s profit margin percentages and attract GST, which is paid by the developer and generally loaded into the purchase price. Often properties are overpriced and have limited capital growth as they are competing with newer apartments that are built every year.

2. Buying properties that banks don’t like

If the banks don’t like lending against certain properties, it is usually for a very good reason. Banks won’t want to risk their money and exposure as they might not lend against certain properties such as country/regional/mining town properties or only lend on lower loan to value ratios (LVRs of only 70%) for commercial properties which they see as harder to tenant or resell.

Some properties that banks don’t like include high rise apartments in the CBD and surrounds, stratum title or company share properties, small apartments including studios and student accommodation, defence housing and serviced apartments.

3. Buying property overseas or interstate

Many investors make the mistake of buying properties overseas or interstate without really knowing those markets and doing their due diligence properly. They are often attracted to the cheaper entry level prices that these offer but they make the mistake of comparing prices in areas they know versus areas they don’t know.

Many Australian investors have purchased property in America, having been attracted to low price tags of $100,000 promised rental returns of 10% per annum. One should ask the question – if the properties were so cheap, why aren’t the locals in America buying them all? 

Our advice is to do your due diligence and study comparable sales in one or a few areas so that you can purchase the right investment property at the right price.

4. Buying non-investment grade quality properties

A good investment grade quality property has a number of common fundamentals that set it apart from poor investment properties that miss a number of common fundamentals including being in a quiet but convenient location, car parking, street appeal, aspect or view and sunny orientation.

Many investors make the mistake of buying a property that is cheap and are lured by a lower price but the problem is that this property will always be cheap and be limited in terms of capital growth prospects and future resale prospects because it doesn’t have key attributes such as an outdoor area or the appropriate floor plan or it is on a major highway. Investors should pay a bit more and get the “right” investment property, not the cheapest one.

5. Procrastinating and waiting for the “perfect” investment

Many investors procrastinate as they talk themselves out of buying an investment property because they are scared of increasing their debt position and getting into further debt, even though buying the “right” investment property is getting into “good debt” not bad debt items that depreciate in value such as new cars, boats, and plasma televisions.

There are not many perfect investment properties that can be rated 10/10 as most properties have some pros and some cons. Investors should definitely do their due diligence before purchasing but should not over analyse or become emotionally involved when buying an investment property.

FRANK VALENTIC is managing director of award-winning buyers’ agency Advantage Property Consulting.

This article originally appeared on Property Observer.

 

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