As a property management team, we work with investors every day. Some are seasoned with an established portfolio of properties, while others have become investors for the first time.
There are many resources online to provide tips for what to look for and how to select an investment property. In this article however we take a look at the most common mistakes we see investors make.
1. Thinking too much about timing
Timing is a trap in many ways for property investors. Those new to investing can spend many late nights and early mornings looking at Domain and Real Estate websites to see the latest houses on the market in the areas they're looking. This can become addictive to the point that you're always looking for the next better thing, rather than making a decision to move on something which will work for your circumstances.
Waiting for an opportunity that will work for you is smart. Waiting for the best opportunity is not. There is no "best" opportunity in investing. There are simply opportunities to make poor or good (thoroughly researched!) decisions which you can make work.
If you wait, there could always be something better. But then again, the best opportunity for you might be the one you just decided to pass up while you wait for the best thing.
Don't get into analysis paralysis. If you see an investment opportunity that stacks up for you after significant research, make a decision on it.
2. Poor forecasting and cashflow management
Early in the consideration process you need to decide whether you are looking for an investment which will generate rental return, or capital gain.
A property which generates rental income will help you to hold on to the property, but will generally take a lot longer for the value of the property to grow. This means it will take longer for the equity in the home to build sufficiently to enable you to "go again" - to purchase another property to build your investment portfolio.
An investment which offers greater growth or capital gain will often generate less rental income. Many investors have been caught out focusing their research on properties in high growth areas, only to find that the rental return they receive from their high-growth property doesn't come close to covering the mortgage on the property. The outcome? They can't afford to hold onto the investment for long enough to see sufficient return.
If buying for capital growth, make sure you can cover the shortfall between rental return and all outgoings, not just the mortage repayments. There will always be contingencies such as blown hot water heaters, general maintenance and repairs, and the occasional unanticipated vacancy period.
Planning for these contingencies is something many new investors forget to do - and it can have dire consequences.
A good property manager will be able to help maximise the return on your investment.
3. Buying with emotion rather than logic
A common mistake made by new investors is to purchase a property as though they will be living in it themselves. Some investors fall in love with a house and, even though knowing it will be an investment rather than their home, start making decisions with the heart rather than the head.
When emotion takes over from logic, there is a less strict approach to finance, sticking to a budget, considering the real rental return, and negotiating strongly to get the very best from the opportunity.
The experienced property purchaser will buy based on analysis, research, and facts. Consider how it will work from a cashflow perspective, how it stacks up against other potential rentals nearby, what type of tenant you're likely to get for the property.
Your decisions need to be based on finance, not emotion.
4. Failing to research the property thoroughly
Before deciding on an investment property, be sure to have researched the property and its surrounding area thoroughly.
This includes speaking with local council, neighbours, shop owners, and real estate agents about the area so you really understand the "lie of the land".
Are there any significant infrastructure or development plans in the area? What is the demographic of the suburb - families, young couples, older / retirees? What is there to do in the area and what type of tenant would this appeal to? What are the historic trends in property value and vacancy rates in the area?
Remember to do significant first hand research yourself. If possible, try to get an understanding of what the property would be like at different times of day, different days of the week, and different times of the year. Is it noisy at night? Are there hoons or significant traffic on weekends? Is there parking on weekdays? What would it be like in summer, winter, on hot days and in torrential rain?
The more you have considered, the more prepared you are. Prepared to run an effective promotion of the property get the right tenant, prepared to answer questions from potential tenants, and prepared for any requests they may have once they move in.
In your research, be sure to consider supply vs demand for rental properties. This is a common problem for investors who have purchased off the plan or in a newly developing suburb - where many investors may have properties available on the market all at the one time. In some cases, supply can outweigh demand, and rents drop in order to compete and secure tenants. Alternatively, the property may remain vacant for longer than you have anticipated, leading to cashflow problems.
Of course, be sure to have building and pest inspections done on your prospective property before finalising a decision. Some relatively minor issues can help you to negotiate a lower purchase price, while others should ring alarm bells and raise red flags.
You can never have too much information about your potential investment property.
5. Thinking you will save money by managing your property yourself
New investors can feel they will save money by self-managing an investment property. In reality, these costs are tax deductible and are relatively small alongside the rental income. We've covered this point in detail in our article "Should I Hire A Property Manager Or Manage My Own Rental Property?".
The cost in property management fees is usually offset by the speed of finding a quality tenant (i.e. reduced time of holding a vacant property), additional rental income an experienced property manager can secure for you and the ongoing peace of mind that comes with it.
Investors also have the consideration of using an online property management service rather than a dedicated property management agent. Often, it is the easiest aspects of property management which are automated by online systems - such as following-up outstanding rent or sending inspection reminder notices. But these services offer little (if any) assistance when the unexpected happens.
A property manager has familiarity with legislation, knowledge of how to negotiate with difficult parties, how to prepare for and succeed at a tribunal hearing and much more. All of these things only seem critical when the run of good times ends and this expertise is needed.
Managing a rental property is a lot of work. If you aren't inclined to thrive dealing with repairs, unpaid rent, problem tenants and marketing, you really should hire a property manager.
Carnelian Property Management Newcastle NSW
We are a family-owned and run Newcastle real estate agent offering expert property management across Newcastle and Lake Macquarie.