Buying an investment property is an aspiration of many. When it is done well it can set you up for a comfortable retirement, help fund school fees, holidays and much more. However, as with every investment, there is always risk involved and if you get it wrong you could lose substantial amounts of money.
One way to learn what to do is to look at what not to do. To help you stay on track, here are 10 major property investing mistakes to avoid.
1. Not choosing the right ownership structure
There is no ‘one-size fits all’ solution when it comes to structuring property investments because everyone’s situation is unique. However, many investors don’t spend enough time up front planning the structure with their accountant and financial advisor and it causes a great deal of trouble down the track.
There are four common ways to structure an investment. You can own an investment in an individual’s own name, within a company, a trust or a partnership. Determining the best fit for you is critical as issues can arise if you chose the wrong structure. For instance, a common issue relates to ownership versus asset protection. You may want to have complete control and ownership of an asset by owning it in your name, but if you are a director of a company and are therefore exposed to the director’s duties provisions in the Corporations Act, it may be better for you not to own the assets or at least only have partial ownership or control over the assets, just in case you are sued.
It is paramount that you discuss your investment structure with your accountant / financial advisor early, as buying an investment property using the wrong structure can be a disaster down the track.
2. Not having a longer term strategic plan
Not knowing what you want to achieve with your property investment is a not a good way to start. Many first time investors don’t consider their long term strategy.
When working out your strategic plan, think about what do you want to achieve and when, Immediate cash flow, long term capital growth, ongoing income in retirement, fund additional investments etc. Make sure you consider the type of property and how many you will need to buy to achieve your goals. You need to also assess how your current finances work within this plan – is it doable?
Make sure you discuss this with your financial advisor or accountant as they are the best people to help you here.
3. Not doing enough research and due diligence
Investments are big decisions and they can go tragically wrong if investors don’t spend enough time doing their due diligence and researching the market. Many investors use property investment companies to help advise them on what and where to invest. Whilst this can help people who are unfamiliar with the process, it is still critical that the investor double checks any suggestions from the investment service.
Make sure they provide multiple independent sources of price data and suburb information, so that you can verify what they have been told. Once you have this data jump on your computer and do your own research. With so much data at your fingertips this is relatively easy to do. Here are some key data points to look out for:
The median price: Not just the current figure, but also how it has fared over the previous 12 months. Also, how does it compare to surrounding suburbs? An area that is significantly cheaper than its neighbours can indicate imminent growth.
Recent sales: Studying the most recent transactions will give you the most up-to-date information on prices in the area.
Vacancy rates: High vacancy rates can indicate a less desirable area, which could make it harder to find tenants and to sell in the future
Future changes: If there are any scheduled or proposed developments in the area, you need to know about them. A new school or refurbished amenities could be beneficial to the area's value, for instance, while rezoning or commercial construction could be harmful.
Expert opinions: There are a number of professionals that offer tips on up-and-coming suburbs via blogs and market reports. Just be wary of any potential biases they might have.
Talk to the local council and see if there are any planned major council developments and infrastructure projects.Whilst this may seem like a good thing at first glance, it is important to determine whether this infrastructure boom is a result of planned growth in the area, or whether the growth has already happened and the infrastructure is just catching up.
A final tip here – if you are using a professional investment service, make sure they provide everything in writing before you jump in and buy.
4. Not buying an investment with the tenants in mind
Before you buy an investment remember it is not the same as buying a home for yourself. When you are looking at buying an investment property consider every aspect of the potential property from a tenant’s perspective – what would they value, what would they pay more for. Whilst it is a good idea to like the property… you don’t have to love it. What is more important is location; being close to transport and retail centres, schools, parks, universities etc will increase your rental value, as will a nice view. Another factor to consider is the neighbourhood itself. Is it safe, do people want to live here, are there any rowdy neighbours in the area.
A major concern for many tenants especially in the cities is parking – nowadays tenants expect double car accommodation. At the very minimum make sure you look for a place that has off street parking for at least one car.
Additionally, there are some added features that can make your property appealing to tenants
Good quality kitchen
Air-conditioning / heating
Good quality fixtures and appliances
Quality blinds, shutters or curtains
Good cable connection for internet and Wi-Fi, a strong signal for smart phones, and multiple power points to facilitate simultaneous connections across a multitude of platforms
5. Borrowing too much money and not planning ahead
Many Investors can get over confident when they have bought multiple properties – they think they are on a roll. However, re-financing can become an issue if the investor has borrowed to their limit. This is especially problematic given the tightening in lending restrictions.
If you borrow 95% you have no wriggle room when interest rates go up and rents don’t.
Additionally, if you are a couple make sure you plan ahead for any changes to your income stream. For instance, if you are both working when you buy your investment property, but then one takes time out of the workforce, either voluntarily or not, you may end up not being able to pay your investment loan and being forced to sell before you want to. Factoring this in early can save heartache down the track.
6. Not adjusting rent to market conditions
The market determines the appropriate rent and if you don’t take this into consideration you may end up pricing yourself out of the market. Tenants either won’t be able to pay their rent or you won’t be able to find new tenants to move in.
If your rent is too high, every month you spend trying to find a tenant who is willing to pay it, means another month of vacancy and no rental income. Compromise is the key here and as market conditions change in the future there may be an opportunity to adjust your rent then. 80% of something is better than 100% of nothing.
On the flip side, rental markets can move at a faster rate than the buyer’s market. Demand increases regularly. Ensure you talk to your property manager each year, compare the market and if it is suitable increase the rent. Keep in mind smaller annual increases are easier to absorb by tenants than larger scale increases.
7. Not having the right insurance
Things go wrong, properties get damaged, some tenants willingly damage properties whilst others fail to attract tenants for an extended period of time. Not having the right landlord insurance to help cover damage and rental shortfalls can have a massive impact on an investor if they have to find the cash to make repairs or pay the bank back. Spend time researching the market and remember cheapest isn’t normally the best.
8. Not claiming all expenses and using a depreciation schedule
Many investors are not claiming all of their expenses including depreciation on the property and therefore they are missing out on significant tax deductions.
Make sure you keep your monthly rental statements and invoices from your property manager, or ask them to provide you with a yearly summary of your property detailing rent received and expenses paid on your behalf. This summary must be given to your accountant.
If you renovated your investment, ensure you get a Quantity Surveyor to provide you with a Scrapping Schedule or talk to your LJ Hooker Property Manager as we a have a corporate relationship with BMT Tax Depreciation Specialist and they too can help. You want to make sure you are claiming all relevant tax deductions for old fixtures and fittings that were thrown out.
Also ask your Quantity Surveyor for a Deprecation Schedule as this enables you to claim the lowering in value of add-ons within your property, or the property itself, which can be a great way to minimize your tax expenses and to maximize your return on investment.
In addition, make sure you get a loan statement from your lender and provide this to your accountant so they can calculate the interest paid on your loans.
9. Thinking you’ll save money by managing the property yourself
Although many investors are financially-savvy, when it comes to finding tenants, dealing with day-to-day property issues or legal jargon they are left in the dark. Experienced property managers can help make sure you receive a reliable income stream, excellent capital growth and the best returns possible - as well as a guarantee of exceptional customer service.
A good property manager, like the team you’ll find at LJ Hooker, will provide you with regular and thorough property inspection reports, copies of all important documents and conduct annual rental review to help you achieve your investment goals.
A property manager costs approximately 7-10% of your total rental income, however the services and expertise offered by a good property manager is worth much much more than this fee, plus in many cases the agents service fee is tax deductable.
10. Not keeping and supplying all documentation to your accountant
Not keeping good records can really impact your investment profitability. Make sure you talk to your accountant about what documentation the ATO requires you to keep to support your tax return and claims. A safe suggestion is to keep all your receipts even if they are small as it doesn’t take long for these to these expense to add up. Your accountant is the best person to determine what is claimable and what is not so provide all this information to them. Be careful not to lose any receipts as misplacing them may mean you show a higher capital gains and therefore tax relating to it.
In addition to tax receipts keep a logbook for any travel/car expenses relating to your investment property, and a documented / diarised account of any inspection trips to the property/s. Make sure you include the reason for the visit and the date.