NOTE: This blog post is originally posted on the TPI Mag site HERE.
We know property is (for most of us) the single biggest financial decision we will make in our entire lives.
We all want to get it right… but how do we avoid the mistakes if we don’t get to practice? Corelogic research indicates we hold a house for an average of 10 years. This means most adults may only buy and sell a home around 5 times in their lifetime, with long breaks in between. The cost of making mistakes on a transaction this size could be more than you make working full time for any entire year… it makes sense to try and understand the pitfalls so we can avoid them.
Below is a list of the most common mistakes we see buyers making on a regular basis that cost them significant time, money and heartache – read them all…it could save you a small fortune & years of wasted time. The list is aimed at property investors but also applies to buying your own home.
1 Not having a plan – buying aimlessly is counter productive and owning the wrong property is a dead weight to your financial future. Real estate is lumpy, it is hard to buy and sell so it only makes sense to think twice before choosing what to purchase. Set long term goals, THEN short term goals & stick to them.
2 Ignoring the fundamentals of supply and demand – if you want the property to experience capital growth (don’t we all?) then you must understand the basic rules of the game. Supply is the amount of available housing now and in the future. Demand is the hunger from human beings to buy, rent or live in said housing. Property investors should look for RISING demand but LIMITED supply to maximise the chance of growth.
3 Being led by the media – In my 16 years of property investing I have seen articles saying that the market will crash by 50% and now is the wrong time to buy property EVERY SINGLE YEAR. This makes for great newspaper articles but most journalists know very little about real estate. Of course we need to understand the market and be smart but there are always opportunities to buy and most people would be better off if they purchase when they can rather than giving in to the fear based media.
4 Not doing enough research & rushing it – a transaction involving $500k-$1m or more deserves some good research. Don’t rush it. Don’t just drive down the road, or to the next suburb and buy anything that takes your fancy. When I bought my first property I had to subscribe to several local newspapers, print out expensive paper based suburb sales reports manually and drive around streets using a pen and highlighter to map the sales history of an area. The internet means buyers have more research tools at our disposal than ever before – there is no excuse not to use it.
5 Analysis Paralysis – research is important but at Precium we have seen many people send literally years searching for the right property only to miss an entire boom phase. This costs hundreds of thousands of dollars in lost opportunity. Don’t let fear (see point 3) drive your decisions. Picking a few key things to measure in line with your goals and moving forward each week using baby steps will create momentum and help you avoid getting stuck.
6 Not knowing your credit/finance – this is vital. Not understanding how much you can borrow has cause some buyers to make offers on properties and even pay non refundable deposits only to fail to settle, losing up to 10% of the properties value. That could be your entire deposit that you have spent years saving for. Get help from a good mortgage broker or at least speak to your banker if you have a personal relationship and understand what you can borrow BEFORE you start bidding at the auction or submitting offers on a property.
7 Job Hopping – in line with point 7 above, you should spend the year prior to buying property in a stable employment environment. Banks don’t like risk, and they believe moving jobs increases risk. Be boring and stay in that stable job until your finance is approved and the house is settled, then if you want a career change you can do it afterwards.
8 Too many credit cards – another finance mistake. Taking on multiple credit cards, personal loans or afterpay purchases will impact your borrowing ability, so avoid this in the leadup to a property application. Live frugally for a while so you can get the property you want, it is called delayed gratification and it is a life lesson your grandmother tried to teach you. It still counts.
9 Not getting the right loan – paying too much interest or being stuck with a dodgy loan can impact property investors who want to build a portfolio. Getting good advice should help.
10 Underestimating buying costs – remember in addition to your deposit you need to fund stamp duty, solicitors, building inspections and buyer’s agents if using them. The combined total of extra costs on a property can be around 5% so ensure you have access to funds as you need them to settle.
11 Buying investments with heart and not head – the colour of the paint on the wall will influence your subconscious feelings during an open home but it SHOULD NOT influence your decision to buy. Moving from emotion to logic and back again is a process that will check whether you are just letting emotion drive your choices, or whether the property lines up with your long term goals (see point 1). The numbers have to work, and sometimes this means buying properties you would not personally want to live in.
12 Not Doing Proper Due Diligence – we see almost every buyer failing at this one. You don’t know what you don’t know. Once you have had an offer accepted there are a lot of things you should check (we use a detailed checklist with our clients) to ensure the property is not a lemon or doesn’t have some kind of problem you don’t know about.
13 Not understanding Cashflow / Holding costs – if a property costs $500k, and rents for $482pw, this is a nominal 5% return ($482×52 / $500k). If you are paying 5% interest only to the bank this is neutral (ie the rent covers the interest) – but remember you will have the property vacant a few weeks per year if the tenant moves out, you have to pay rates, insurances and other costs, and your loan may be P&I so in most cases this property will cost money to own each week. You might be planning for the capital growth to eclipse that weekly cost (if you purchase well it should) but you still need to afford it in the meantime, so run we a comprehensive cashflow model for all our clients so they know whether a property will cost them $12, $37 or $95 per week to own.
14 Not modelling the profit accurately if renovating or developing – this one is for the more advanced investors or those doing property development. Not fully understanding all the costs of renovating for profit or developing multiple units on a block of land can ruin you faster than a drunk week at a casino. Feasibility studies are essential to know what profit to expect before you make a single offer on a property.
15 Not negotiating well – we love negotiation! It is (in our opinion) the highest per hour work most people do in their lifetime. If in 3 phone calls I can change the purchase price of a property by $60k, then I have just made $20k per phone call. The trick is knowing what to say, when to say it and handling the pressure in between. It is a learned skill and a very profitable one, so learn it or get help from an expert!
16 Not understanding the contract – Property contracts are written by sellers and usually designed to protect them so it is really important to have your own solicitor review and make any changes to ensure your interests are covered. Whilst you can do your own conveyancing if you wish – we don’t recommend this, it is just too important.
17 Not having right insurance – once you own a property having adequate insurance is important so you can sleep at night and respond to any problems including tenancy issues, fires, flood or other catastrophes.
18 Not making rental properties safe for tenants – if you are going to be a landlord, do it well. Make sure you approach property investing like a business, good customer service means making your home safe, neat and tidy for tenants. Even if you are providing cheaper or working class housing you can still do it well, keep properties well maintained and the bonus is you get to feel like a decent human being too.
19 Not keeping good records – your accountant will ask you for all the relevant records at tax time. The better your system for keeping those records the easier your tax returns will be. Set up a central filing system or computer folder to store it all, you will thank me later.
20 Not choosing correct ownership structure – most people can buy the first few properties in their own names, but get good advice as it impacts personal tax, land tax, and some people have serious risk issues in their main business that they need to protect property assets from, which might mean company or trust structures are better in some cases.
21 Trying to do everything yourself – Not having a good team is really the root of the above 20 problems, getting good advice and having expertise in all the areas you are lacking is the best way to fast track your success in property. Doing everything yourself is slow, hard and can result in expensive mistakes. Be warned: There are lots of spruikers and con artists out there, so choose carefully and check independent reviews but property investing is best done as a team sport.
We hope this list helps your next property purchase, we wrote it because we know the property industry is biased towards sellers and we believe buyers need all the support they can get.
Which of the above mistakes have you committed before and how would you overcome it next time?