It can be easy to follow misinformation and rumours when it comes to real estate investing. You have to find information that suits your needs and sounds intuitively correct to you. The aim is to avoid mistakes, but sometimes making a mistake is necessary in order to learn the lesson.
Here are some mistakes that I’ve learned from, or seen others make. Now that you understand them, make sure you don’t make them too!
1. Buying Property Because it’s Cheap
This mistake applies to property as much as it does to shares and also any other product out there. Just because something is cheap, does not mean it is good value. It could mean that, but the point is: don’t just ignore all other factors when you see a cheap property for sale.
Things often get discounted, because nobody else wants it.
The trick is to buy a property, while not many others want it now, but with a view to it becoming more popular in the future.
2. Not Getting Inspections Done During Purchase
It is within your rights to have inspections done during the conditional contract period. Some of these might be:
- Building Inspection to find potential structural issues, or items that are broken but not immediately obvious
- Pest Inspection to find termite damage, or nests (such as cockroaches or rats)
- Strata Inspection to find out how the common property fees are spent (in apartment or townhouse complexes)
The building and pest inspections are most important when buying older houses, as newer properties are not likely to have too many issues. But even if the house is a few years old, you should spend the money to give you peace of mind and prevent any unwanted surprises.
A strata inspection may seem like a good reason to waste money, but strata fees (or body corporate management fees) are not fixed and will go up if major maintenance needs to be performed on common property.
You will ultimately be the one who ends up paying their fair share for this, even though you may not receive any direct benefit from it.
For example, in a large apartment complex, a driveway (that you don’t use yourself) at the back of the property may need to be repaired. Your strata fees may go up temporarily to address this, yet because the driveway is not used for access to your property, it will seem like wasted money.
A strata inspection should let you know about any major works in the pipeline and whether you are willing to accept how they manage these expenses.
3. Buying in an Area that has Historic High Growth
This one is a common mistake and I admit that in the past I have also been swayed by the great historical performance of a suburb. You see a suburb with 12% per annum historic growth over a 5 year period and assume that it should also grow at that rate in the future.
You should view a suburb’s good performance in the past as a missed opportunity. Unless of course, your research shows that the capital growth SHOULD continue in that suburb, the historic growth really has little indication that you are buying a great investment property.
4. Buying to Save Tax Only
Normally you can claim tax deductions for expenses on an investment property, which helps with the holding costs. Tax deductions can be a great bonus of buying an investment property, but they should not be your prime motivation.
Remember, in order to get a tax deduction, you need to be making a loss.
I have expanded on this concept before, you can read it here.
Your primary motivation for investing in property is to increase your net wealth (equity) and create a long term, passive income that you can live off.
5. Not Claiming Depreciation
In Australia, you can claim depreciation against the building and it’s fixtures/fittings for investment purposes. It makes sense, because it is the same as a business claiming depreciation on a piece of machinery or equipment.
A house on a block of land, will depreciate in value over time, yet the land itself generally increases in value assuming the demand remains strong in that area.
When I first turned my home into an investment property, I failed to bother claiming depreciation for the first few years because I thought I wouldn’t get much out of it (the house was quite old).
This was a mistake, and if I had of taken the time to hire a quantity surveyor to create a depreciation report, I would have earned hundreds…maybe thousands of extra dollars in tax breaks over that period.
I haven’t made that mistake again and have been enjoying the benefits of claiming depreciation, ever since.
If you’re not in Australia, find out if you can claim depreciation on your real estate investment.