6 property investment mistakes and how to avoid them
If it makes you feel any better, everyone makes mistakes, and this can apply to an entire financial system.
According to the Australian Prudential Regulation Authority (APRA), the proportion of interest-only loans as a share of total loan approvals exceeded 60 per cent by 2017. The popularity of interest-only loans also meant that by early 2017, 40 per cent of household debt did not require payment on the principal loan. With figures like this, it is easy to understand why the average household debt-to-income ratio increased to 140 per cent in 2017, making affordability a major issue for both new homeowners and those wanting to invest in property. Investors who do not consider future changes in their economic situation, or make some of the following mistakes when investing in property, risk finding themselves in the sort of financial stress that an increasing number of Australians are experiencing.
Before you consider investing in property, especially if this involves using the equity in your home to invest, make sure you have addressed the following potential property investment mistakes and attempt to avoid them.
1. Not reading your contract
When buying off the plan, be sure to both read your contract and have a property lawyer look it over with a fine tooth comb. They will highlight any areas in the contract that potentially compromise your rights as an investor.
For instance, does the contract include a sunset clause, and what are your rights in relation to making any changes to the designs of the property? If certain agreed materials are suddenly unavailable, does the builder have to consult you when selecting replacement materials? You don’t want to finally inspect your investment property eighteen months after signing the contract to find you haven’t received what you paid for.
2. Stretching your finances too thin
A large cause of financial stress, and one of the big property investment mistakes easily made, is investing in property that is at the limits of their ability to finance. Look at properties that are 10-15 per cent below your calculated financial limit, and do not exceed this. Remember that there are various hidden costs of investing, such as administrative fees, repairs and stamp duty tax, that will all impact your immediate cash flow following the investment.
3. Not making the most of tax incentives
Investing in property requires significantly more research into the industry than buying a home does, as you are essentially running a business. You wouldn’t just buy a new business without researching every aspect of that business, and this applies to buying an investment property. Both doing your own research and consulting an accountant and property lawyer will highlight various ways you can minimise your expenses when investing in property. For instance, have you heard about the six year rule?
Many young property investors do not know that by living in that investment property for at least twelve months, they are then able to claim tax concessions on the capital gains they earn for the following six years after they have left the property. This can provide you significant savings in the long term.
4. A lack of research.
Use the free tools available to you, such as our own Price Estimate tool, to get an accurate estimate of property prices as well as key demographic and market data for specific areas.
Consider short courses that teach the principles of healthy property investing, as they will guide you away from making some of these costly mistakes.
Lastly, use both property appraisals and property valuations (what’s the difference?) so that you can make the most out of refinancing based on accrued equity in your existing home.
5. Investing in property alone
There are two aspects to the mistake of going it alone.
Firstly, make sure you form a solid team of professionals around you, including an accountant that has detailed knowledge of how investing in property relates to smart tax decisions, a property lawyer who will guide many of your administrative decisions, as well as a certified financial planner. Secondly, consider buying property with friends, as this can accelerate your entry into the market, share the financial load (and risks) of investing, and provide you with more opportunities to invest in other areas.
6. Speculating and loading on your equity
While the issue of unhealthy lending practices has been significantly addressed through regulation by APRA and awareness of it by the general public increasing, it is important that you do not fall into the trap of overloading your investments by borrowing too heavily on accrued equity in existing investment properties. Relying too heavily on such incentives as negative gearing exposes you to market fluctuations, and can be one of the biggest mistakes an uninformed investor can make.