By Victor Kumar
Human psychology means that we can quite easily be led by others.
While sometimes it can be fun to go on adventures without knowing the destination, when it comes to your finances it’s imperative that you’re not flippant with your future.
So, in the third part of my series on the worst property investment mistakes, I’ll outline the common mistake of choosing the wrong type of property as well as the wrong location, which is often because you’re following the crowd.
Don’t be a sheep
Many people buy properties out of sequence because they’re influenced by others. For example, they buy in Sydney simply because all of their friends are doing so or the market is “hot”.
However, that property could be totally wrong for their portfolio and so could the location.
They might get growth but the cash flow is absolutely atrocious and therefore that will impact their future lending prospects.
Now, there is nothing with buying in Sydney, but you’ve got to wait until the cycle corrects itself.
When the yields start rising again, that’s when you buy so it’s not such a huge drag on your cash flow.
In the meantime, you buy properties in other States where the cash flow and market cycle is more favourable.
The Sydney market today means it will cost you at least $200 or $300 a week to hold a midrange unit before tax.
With the same weekly cash flow you could hold two or three properties in different States, which would increase your diversification as well as protect your exposure to market fluctuations.
If we think about houses, the cheapest in metropolitan Sydney is at least $550,000, but in places like Logan in Southeast Queensland, I recently purchased a house for $265,000.
That means I could buy two houses in Logan instead of one in Sydney, which would provide me with diversity and still have the same type of growth over the long-term.
I find that too many people try to play catch-up, but they’re usually reacting to the market after the ship has already sailed.
They may also see other people who have properties that have development or granny flat potential and they jump on to that bandwagon straight away, when they should have started from the basics, such as simple buy and holds.
Start at the beginning
Too many new investors bite off more than they can chew. For example, they may buy a major renovation project when they don’t know how to project manage or even whether they need to paint or polish the floorboards first!
That’s why it’s imperative that you start at the beginning and consider which market is best for you to invest in as well as which type of dwelling.
The secret is that there is no one-size-fits-all when it comes to successful property investment.
It comes back to what your financial fingerprint is, such as how much deposit you have, what your goals are, what your weekly negative cash flow tolerance is as well as your timeframe. All of these factors will then determine the area and type of asset you buy.
Many people make the mistake of choosing a dwelling solely on the size of their deposit and their limited location preferences.
Say they only have a $40,000 deposit, it will probably limit their options to units in a capital city.
However, if they were to look at major “regional” centres, then they may well be able to turn that unit deposit into one that’s big enough for house.
In Ballarat, for example, you can buy a house for sub-$250,000’s and they rent for $230 or $250 per week, so they look after themselves financially.
The growth may be a bit slower, but it will definitely be there because those locations also have million-dollar-plus properties.
Another key to success is to always be looking two property purchases ahead.
You need to ask yourself whether the property you’re considering will negatively impact your cash flow so you can’t borrow again.
Plus, you must determine how quickly you can recycle your deposit (or equity) out of that property so you can buy another one.
The key message here is that you’re buying that property solely to get one step closer to your goal.
Of course, you need to develop a goal to start off with, so once you’ve done that, how do you achieve it?
One way is to buy counter cyclically, which is away from where everyone else is buying, so long as the area where you are buying is trending upwards.
In today’s marketplace, that could perhaps mean South Australia, Queensland or in Victoria – and potentially in Perth later this year because that has started to show signs of recovery.
You must always buy into an upward trending market as well as try to stay away from lifestyle purchases where the main motivation is chasing yield in places like Tasmania.
Tasmania’s market may have had a recent upswing in price due to its affordability and higher yields, but it has an economy with only two gears – no growth and little growth!
Let’s not forget that property performance is underpinned by population growth.
If we were to take all of the fundamentals away, if the population is not growing, then there is no pressure, and therefore prices won’t go up.
It’s as simple as that.
Growing your portfolio
If you have an existing portfolio, you may want to think about how you are going to grow it over the next year or two.
If you’ve been investing heavily in Sydney, I’m not adverse to letting some of them go so you can invest in multiple properties in other locations.
That’s because it’s become increasingly difficult to qualify for a loan so if you’ve got plenty of equity or cash behind you, you’re much more likely to be approved.
As you can see, one of the most common mistakes that new investors make is to follow the crowd and buy in the wrong location.
They also don’t thoroughly understand which type of property will enable them to move on to the next one and the one after that – which is much more important than whether they buy a house or a unit.
If you missed the first part of this special series click here to read all about how a lack of planning is a common property mistake.
If you missed the second part of this special series click here to learn why cash flow is so important at the start of your journey.
By Victor Kumar