30 Nov 2016
With interest rates now at record lows, more people are deciding to buy an investment property to help fund their retirement – but some problematic trends are emerging.
This is particularly true of eastern states’ capital cities such as Melbourne and Sydney, where annual capital growth of properties in some areas is up to four times the rate of inflation.
In addition, more first-time investors are now beginning to target the Perth, Adelaide and Brisbane real estate markets as they view them as undervalued.
Buying property is a great way to create wealth over the long term, as long as you avoid simple mistakes at the outset of your property investment journey.
The sad fact is that many rookie investors never buy more than one investment property because they make avoidable mistakes from the very start.
These simple mistakes, such as failing to undertake enough research, selecting the wrong home loan or not obtaining a tax depreciation schedule, can be the difference between success and failure for first-time property investors.
Avoiding these simple mistakes means that rookie investors can build a successful property portfolio and thereby create long-term personal wealth.
Below are seven of the most common mistakes made by investors:
- Buying an investment property without thoroughly looking at capital growth and rental return potential. Research is critical when buying an investment property. Most real estate institutes throughout Australia provide free online information on their websites about the long-term performance of individual suburbs in terms of capital growth, which is a good resource for first-time investors.
- Buying an investment property close to home rather than looking at investment opportunities throughout Australia. That could mean that they achieve below average capital growth rates and miss out on potential property hot spots in other locations.
- Failing to seek independent information. It is important to seek out people who own several investment properties and ask them how they managed to build their portfolio. They can provide very important tips on how to avoid simple traps and pitfalls when buying investment properties.
- Managing the property yourself. This puts the investor at a very high risk of selecting the wrong tenant as they cannot undertake the necessary background checks on tenants as a reliable property management company.
- Not undertaking a full assessment of the true cost of buying and holding the property. For example, if the property is an apartment, there are additional cost issues compared to buying a stand-alone house (such as strata fees). In addition, if the property is old, it many incur higher maintenance costs.
- Selecting the wrong home loan (i.e. principal and interest), which is typical for an owner occupier home. Instead first-time investors should focus on interest-only loans, which will help increase cash flow.
- Buying a property in a location that is not attractive to tenants i.e. not close to amenities such as shops or transport. Investors can also buy a property in an area where there is an oversupply of properties meaning rents will be low and capital growth rates limited.
Source: Smart Property