Our resident property expert, Henny Stier, shares her sage advice on building wealth through property investment.
As buyers agents, we assist people to search for and purchase properties. Some of these are homes to live in and others are for investment. Based on years of experience in helping our investor clients to purchase properties, we have noticed there are five common pitfalls among would-be investors. They are as follows.
1. No clear strategy
Many people simply search randomly online for properties without having a specific strategy, a lot may read news articles about predicted booming suburbs and use that as the basis of their search, and others still simply go on the advice of well-meaning friends and relatives. Many buyers also tend to stick to the areas they know best because it is their comfort zone.
Most people will make decisions as they go along, rather than having a top-down strategy in place. It is important to remember that an investment property strategy goes beyond just the purchase and should also take into account an exit plan – whenever that may be, depending on your time horizon.
2. Letting personal taste get in the way
Buying an investment property should be done with the head and not the heart. A lot of buyers have difficulty leaving emotion out of the equation and let too much of their personal taste get in the way of what should be a purely business decision. This problem is often very difficult to overcome particularly when a buyer is not clear about the long-term goals for the purchase and starts to think that they may possibly move into the property one day themselves. In these instances, they begin to look at properties with both the lens of an investor as well as an owner-occupier, which can be detrimental.
3. Focusing on rental yield or tax benefits as opposed to capital growth
The number one thing you should focus on when buying an investment property is the capital growth. Rental yield usually comprises only a small fraction of the Total Return. Accountants may also tell you that the focus should be on tax benefits (such as depreciation). While these benefits factor into the equation, some investors lose track of the main objective – to find a property that will provide highest expected Total Return in the medium to long term. Likewise, some investors focus too much on rental yield. Traditionally, properties with high yields don’t generate the strongest capital growth and vice versa. If you have to choose one, capital growth wins hands down each and every time because an extra $50 per week here or there in extra rent is nothing compared to how much the right property can grow in value in just a year.
4. Not considering the tenants
Some investors focus on the numbers so much that they begin to lose sight of the fact that at the heart of every property investment decision should be the tenant. As a rule of thumb, you should always think hard about whether the property you purchase would appeal to not just any tenants, but the right kind of long-term, responsible and financially stable tenants that you would like. You should also make sure the investment property you purchase has a certain unique factor to it that would attract competition from prospective tenants.
5. Purchasing properties with high ongoing maintenance costs
While owner-occupiers may be willing to pay for premium amenities, such as lifts, concierge, and pool/exercise facilities in units, these just eat into your bottom line if you are an investor. As a result, newer high-rise units seldom make for the best investment property. For houses, pools can often be costly for landlords as they are not always well maintained by tenants and safety compliance as well as replacement parts can be expensive. The running cost of these items often exceeds the additional rent the landlord might receive.
Dying to know lots more about buying an investment property before you leap into the deep end? Henny Stier (buyers agent), along with Julie Attwood (chartered accountant) and Lara Watt (mortgage adviser) are holding a NSM comprehensive property investment seminar next Thursday, 26 March 2015, in Gordon. For more information and to book your spot, click here.