6 prop­erty in­vest­ment mis­takes and how to avoid them

Wangaratta Chronicle - North East Property Guide - - NEWS - Writ­ten by | view.com.au in Buy­ing

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.

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