A Property blog by Paul Bennion.
The concept of ‘The Seven Deadly Sins’ was historically been popularised in Dante Alighieri’s “Divine Comedy” and more recently in the Hollywood movie SEVEN.
This concept of the seven deadly sins can liberally be applied to some of the many mistakes first time investors make when buying an investment property – mistakes that can lead to financial turmoil.
The sad fact is that many first time investors never buy more than one investment property because they make simple mistakes from the very start.
These simple mistakes such as failing to undertake enough research, selecting the wrong home loan or not obtaining a tax depreciation schedule can make the difference between success and failure for first time property investors.
Avoiding these simple mistakes means that first time investors can built a successfully property portfolio and thereby create long term personal wealth.
Below are seven of the most common mistakes made by first time investors:
- Making an emotional decision when buying an investment property. These first time property investors buying an investment property they would like to live in without thoroughly looking at capital growth and rental return potential. Research is critical when buying an investment property. Most real estate institutes throughout Australia provide free online information on their websites about the long term performance of individual suburbs in terms of capital growth which is a good resource for first time investors.
- Deciding to buy an investment property close to their owner occupier home rather than looking at investment opportunities throughout Australia. That could mean that they achieve below average capital growth rates and miss out on potential property hot spots in other locations.
- Selecting a property based upon advice of friends or family rather than seeking independent information. It is important to seek out people who own several investment properties and ask them how they managed to build their portfolio. They can provide very important tips on how to avoid simple traps and pitfalls when buying investment properties.
- Failing to obtain a tax depreciation schedule for the property. The tax benefits derived by a depreciation schedule can be as high as 60% of the rental income and this additional cash flow can assist the investor to purchase additional properties.
- Not undertaking a full assessment of the true cost of buying and holding the property. For example, if the property is an apartment, there are additional cost issues compared to buying a stand-alone house such as strata fees. In addition, if the property is old, it many incur higher maintenance costs.
- Selecting the wrong home loan i.e. principal and interest which is typical for an owner occupier home. Instead first time investors should focus on interest only loans which will help increase cash flow.
- Buying a property in a location which is not attractive to tenants i.e. not close to amenities such as shops or transport. Investors can also buy a property in an area where there is an oversupply of properties meaning rents will be low and capital growth rates limited. They could also end up with a bad tenant by trying to select the tenant themselves rather than using the services of a number of reliable property management companies.