“The trouble is, you think you have time” – Buddha.
Procrastination – property investment is not a ‘get rich quick scheme’. If that’s the kind of risk profile you have, then you are a speculator, not an investor. Time in the market is crucial to riding out any volatility in rent returns and values around the long term trend line. Many people take so long waiting to ‘jump on the train’ that they miss one after the other and are left back at the starting line for years. Remember the ‘miracle’ of compounding! Starting your investment journey as early as feasible allows you to reduce your risk, minimise outlays and maximise the potential returns.
Not seeking professional advice – in a highly specialised economy, it pays to leverage off the expertise of qualified, experienced professionals to support your investment decisions. This applies to seeking advice re finance structures (investment broker), planner and accountant, legal entities, tax implications and ownership splits (accountant), estate planning and exit strategy (financial planner and accountant), and of course investment property choice, purchase and setup implementation with a property investment advisor.
Not having a plan – It’s said that ‘it’s a long time on the golf course if you don’t know where the 18th hole is’! It’s the same in life. Do you simply want to wait and see what happens or do you want to take charge and have an influence over the outcomes and options in your life and the lives of your family?
Investing allows you to identify that 18th hole and perhaps enjoy the 19th more!
Overcommitting – because property investment is a long term strategy, it’s necessary to make it sustainable for the long term. So the investor should not (and should not be encouraged to) overcommit. Your borrowing capacity may be large, but that doesn’t mean that you should spend to your limit. Borrowing capacity doesn’t necessarily equal your ‘comfort’ range. Ideally, the property should be able to tick away in the background without a significant imposition on your budget or lifestyle. Additionally, not using up all your borrowing capacity allows you to come back and buy again too – it means having more than ‘one pot on the boil’ at a time.
Lack of diversification – this applies to having a mix of asset classes and within the property class, mixing up the locations, types and price points. Allied to the last point about over-commitment, is the consideration of whether it’s wise to buy one expensive property if funds allow, or two lower-priced properties? Typically two lower-priced properties is a better idea because it spreads the location and type risk, and it also increases your liquidity. Property is a relatively illiquid asset – so if you need to access some funds or divest for some reason, you don’t have to exit the market altogether but can do so in part.
Assuming that nothing will ever change in the future – it’s vital to ‘stress test’ your choices. Once again, because a property is a long-term investment, you need to understand that there are no guarantees in life. Interest rates can go up (or down), and rents are market-determined and therefore can vary from time time, additionally, government policy and regulation, in particular, tax incentives can change, and personally, your circumstances are also subject to change and may have an impact on the sustainability of your investment position. Job security, relationship status and health may all throw ‘curve balls’ into the mix over the long haul. It is a reinforcement of the recommendation to invest sustainably and for the long term so that you ride out the ups and downs in the market and life.
“The only ones to get hurt on a roller coaster are the jumpers.” Paul Harvey
Inadequate insurance and risk mitigation strategies – keeping in mind that ‘profit is the return to risk’, the savvy investor acknowledges the risks and takes steps to address them as adequately as possible. It starts with using credible and qualified team members in the journey and seeking advice, asking questions, stress testing, making dispassionate decisions, and having adequate insurance in place ( building, landlord’s, contents, perhaps income and life) and not over-committing.
Making changes to finances midstream – Lender’s ‘goal posts’ shift all the time, and typically there are many hoops to be jumped through to be approved for a loan. Once a pre-approval is granted, it is recommended not to make any changes to your financial position, such as going out an buying a new car or changing jobs, until the loan is funded. (even formal approval may not be enough to allow changes to financial behaviours). Consistency is particularly crucial for settlements that are a long way off. There is no certainty that lending criteria will remain the same in 6 or 12 months. Once again, qualified, honest and compliant professionals in the property investment space will make you aware of this risk and help you to decide if it’s a suitable one for you to take.
Looking over the back fence – this one relates to the idea that you need to buy where you live and where you think you know. Australia is a vast country, and as we have discussed, there is no one property market, there are opportunities across states and regions, in inner, middle and outer ring suburbs in different types and style of houses. You are limiting your options and diversification by not considering the alternatives. It also pertains to the idea that if the property is close to where you live, you can look after it! That is the job of your property manager – engage professionals to do what is best done by them, keeping the emotion out of it. As your portfolio grows, there isn’t time to be doing your job and managing several properties. Property management fees are tax-deductible, a professional expense incurred in running your property investment business.
Unreasonable rent expectations – it’s a fact that rents are market-determined. There is no point leaving a property vacant in the hope of finding a tenant who will pay $520pw when the property manager is telling you that $500pw is the highest possible return at this point. Every week the property sits empty it costs you $500; if it is vacant for a month, then it has cost you $2000 or nearly $40pw. You are better off taking a tenant straight away, minimising vacancies and sacrificing the $20pw (or $1040pa) rather than $2000. Be pragmatic and don’t ‘shoot yourself in the foot’!
Recordkeeping – To make all the claims you possibly can and therefore minimise the bottom line, meticulous records must be maintained. Those who don’t have a system for recording all their property expenses will more than likely miss out on allowable deductions and cost themselves money! The ATO specifies that the property investor must keep proof of income and expenses and supply them on demand for the last five years. Typically investors use excel spreadsheets and shoeboxes of receipts and scramble at the end of the year to provide a record of the financial year to their accountant to decipher. Alternatively, ASPIRE clients have access to a Portfolio Manager to record, track and visually present their income, expenses, and asset position at the click of a button.
Not understanding the purpose of bank valuations – Valuations are a measure of the bank’s appetite for risk, which varies over time. There is a difference between a bank valuation (done to protect the bank’s balance sheet) and market valuation. Bank valuations are inherently conservative and vary widely. It is wise to be prepared for some variation in the valuation from the contract price, anywhere between 5-7% is quite routine. Appraisals are very much an ‘inexact science’ at the best of times; they are heavily dependent on individual expertise and opinion. Forgoing an excellent opportunity that stacks up well in all other respects because of a low valuation may be shortsighted.
Thinking that the lender with the lowest interest rate is best – everyone wants the best deal possible, but the right choice is the lender who will do the deal for you! Some promise low rates but bring in valuations short of the package price, forcing you to contribute more. It’s their informal way of securing themselves. Insisting on saving .25% may save a few thousand over ten years but, if that lender is notorious for conservative valuations or restrictive criteria or is too slow and won’t allow the deal to ‘work’, as an investor you may potentially forgo capital gain for 10 years, which may result in a far higher opportunity cost. Be guided by your broker who knows who’s ‘doing the deals’
Not making all the claims you can – make sure you have an accountant who is up to date and thoroughly conversant with property investment tax legislation. Have a professional depreciation report prepared and claim these ‘non-cash’ deductions; they are significant in reducing your burden and are too often overlooked. Stay up to date with ATO rulings on allowable deductions.