We tend to read a lot of success stories in the news but seldom about the financial troubles or bankruptcy cases. We idolize the youngsters, who managed to build million-dollar portfolios with little capital or income. We dream of retiring early on rental income, just like those property gurus we see peddling investment courses and seminars online.
The truth is, there are a lot of failure stories just as there are success stories out there. That’s why a majority of property investors in Australia tend to own just one property, and never manage to build a portfolio fit for retirement.
Buying a property using a bank loan is also a big risk, and should never be taken lightly. If the economy tanks, the property market shrinks or the rental market stagnates, you are responsible for paying off the investment loan if you can’t sell the property without making a loss.
As political parties squabble over whether to stop negative gearing and reduce the capital gains discount, it becomes more important to avoid making any mistake in case the rules change. The government can easily alter the tax rules to significantly damage your financial stability.
So, if you are planning to dabble in real estate to build wealth, there are plenty of common pitfalls you should be aware of.
1. Mistake #1: Having Unrealistic Expectations
You shouldn’t start investing in properties and hope to become a millionaire quickly. Worse, don’t give up your day job so soon after acquiring enough rental income that matches your salary. This is a long-term investment and requires a long-term strategy.
Don’t be impatient and expect to make a killing after one or two purchases. Property prices tend to increase over time, but it never happens overnight. In the meantime, you still need to fork out money to hold on to your rental or investment property.
If something sounds too good to be true, it probably is. You must know how to differentiate between genuine advice and scams. You’ll find hundreds of property investment seminars if you jump on Facebook or search on Google, so be wary of wasting your money on fruitless advice.
You should also manage your expectations when it comes to timing. You shouldn’t jump in too quickly to buy before understanding your financial position and the property market. Likewise, you shouldn’t wait too long for that perfect property to invest in, because it might not exist and you’ll miss out on other great bargains.
2. Mistake #2: Failing to Plan And Research Thoroughly
It’s true when they say, “Fail to plan and plan to fail.”
Planning involves a lot of research and coming up with backup strategies. It’s not enough to have one entry and exit strategy. You must accommodate for a falling market and tough times, as it can and will happen over the course of your investment.
Think of the worst-case scenario and figure out what your options are should that happen. You must allocate some buffer in your cash flow and budget for when interest rate goes up, or during slower period where you can’t get tenants or the rental rate you want.
3. Mistake #3: Picking The Wrong Strategy
There are many ways to make money in real estate. You can buy a rundown property and spruce it up to sell for a profit. You can also buy a cracker in a great location that can attract tenants easily. Or you can bank on capital growth and take the negative gearing route.
Whatever your strategy is, make sure you understand the regulation, costs and resources required to make it work. For example, do not attempt to buy houses with critical structural issues if you do not have any experience or know the right people to fix it.
Don’t bank on capital growth if you are planning to buy apartments in areas where they are oversupplied. And don’t put all your eggs in one basket by buying one type of property in one suburb such as a mining town where growth can slow down easily.
4. Mistake #4: Stretching Your Budget Thin
You must never buy on a whim, or follow your heart instead of your head. Get your finances pre-approved before making any offer. The worst that could happen is when you have an offer accepted, but can’t get a bank loan approved. Shop around for the best deals from lenders, so you know exactly how much you can borrow and what your repayments are monthly.
Always stick to your budget and your plans. Remind yourself that you are buying to renovate or for your tenants, so don’t go shopping for your dream home.
5. Mistake #5: Poor cash flow management
Once you’ve bought a property, you must manage your cash flow properly. You should already have crunched the numbers for your monthly cash flow with some buffer in place before making an offer to buy.
Never underestimate renovation costs as they can all add up. If you’re renting, save up for those periods when there are no tenants in the house. Some investors forget to factor in costs such as maintenance and repair. Accidents and disasters can pop up anytime and you never know when you might need the extra cash.
Another common mistake is to forget to claim your depreciation costs. This can help your cash flow immensely, as it is an item you can claim for your tax refund without forking out a single cent.
6. Mistake #6: Going It Alone
To be successful in real estate, you will need professional help. These are a few professionals you can engage with:
A mortgage broker can help you get the best loan structure at the best rate for your needs
A real estate agent may assist you to search for a property or sell your existing one for a profit
A builder or trusted tradie can help you with your renovation and building plans
A property manager will sort out all your property management from collecting rent to dealing with nasty tenants.
Most wealthy investors tend to have a team they trust around them. Trying to do everything on your own is not only exhausting but also costly in the long run, especially when you make mistakes.