By Victor Kumar
The thing about investing in property is that it doesn’t need to be difficult or tricky if you understand its various ins and outs.
But unfortunately new property investors often make simple mistakes, which can have long-term negative consequences for their portfolio.
So, in this new eight-part series, I’m going take you through the most common property investment blunders to ensure that you don’t fall into the same old unhelpful traps.
A failure to plan is a plan to fail
The first mistake that newbie investors make is they fail to plan.
They jump into the market when they feel the need to invest or feel the need to catch up with their peers.
They start buying before any planning has taken place at all.
In fact, planning is an after-thought, which is a big mistake.
Many decades ago, I made the same error and just jumped into it because it seemed like the right thing to do at the time.
Fortunately, it worked out well for me, but that’s not the case with today’s market, especially for people who take the “property advice” of their accountant or financial planner and end up buying a new property purely for tax minimisation purposes.
One of the problems with new properties is there isn’t any opportunity to update or upgrade it to increase its value.
When investors start out, the first thing they need to look at is what their reason is for investing.
They need to consider whether they’re investing for tax minimisation or for wealth accumulation purposes because the two require buying very different properties.
That decision must be made long before they buy.
They also need to work out what their end game is.
As an analogy, if you’re going on a journey and you don’t have a destination, well, you don’t know where you’ll end up, do you?
You must understand your investment destination, which should be your ideal income, not the number of properties or your equity position.
Too many investors focus on equity and when the market turns they are forced to sell because they don’t have the cash flow to hold onto their properties.
You can spend your cash flow but you can’t spend your equity, especially in today’s environment of tighter lending conditions.
Your equity is your wealth but your cash flow is your lifestyle however some people invest for lifestyle but confuse it with equity.
If you’re going into retirement, for example, as you get older loans become harder to get.
If you stop working and you’re relying on equity to live off, that’s going to be a hard call in my opinion.
Rather than planning to buy the best property, too many investors jump in because the media says Sydney is going to go up another 10 or 20%, for example.
Or perhaps they buy in outlying suburbs of other capital cities because they read something about those places somewhere online.
That’s not what I call solid research or planning.
Many novice investors also buy into areas at the peak of the market and miss out on all of the opportunities that would have suited them the best.
They also fail to plan the best ownership structure for their portfolio.
For example, if you’re planning to stop working in the next few years perhaps due to an addition to the family or self-employment, which would impact your taxable position, but you’ve bought a heavily negative cash flow property in your personal name then you’ll miss out on capitalising on the taxation benefits.
You always need to plan for the future before you begin.
Investors also need to plan for what renovations can be undertaken at the property before they buy it.
With this in mind, an experienced property strategist can assist you with determining which properties are best suited to your individual situation.
What I mean is that you should sit down with a property investment adviser or strategist who has seen at least two or three property cycles.
That’s because everyone can be a hero in today’s cycle as a rising tide lifts all ships.
It’s before a market softens that you need professional advice and guidance to ensure you can hold or grow your portfolio over the long-term.
Investors need to also plan to buy at the very best time.
They need to consider what will happen in their lives in the years ahead as well as the holding costs and where the property cycle is in the areas they’re looking to invest.
Once you’ve rationalised and planned for your next property investment, then the fundamentals remain the same.
But you must determine from the outset which is the best property for you because it’s not a one-size-fits-all scenario – contrary to popular belief.
Some investor’s financial fingerprint will mean that cash flow properties will be a better fit for them, while others might be able to sustain lower yields so may choose to invest in areas that offer capital growth opportunities.
Too many people mistakenly follow an approach based on one single market doing well or perhaps a new infrastructure project.
What they should be doing is matching a property with their individual financial situation as well as their ability to hold onto the property during tough times.
Over the course of your property investment journey there will be good times and bad times, but you have to be able to ride those ups and downs as you head towards the destination you’d planned for from the beginning.
By Victor Kumar