5 Property Investment Mistakes to Avoid
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.
Not True.
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.
But surely historic growth, especially over a 5 year period rather than a sudden burst in a shorter time frame is some evidence to support an assumption of future growth. I think you are dismissing this a little too quickly. It is not determinative, but certainly justifies a rebuttable presumption.
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Yes, that’s a fair point. Historical growth can be an indicator, but I just stress that investors should determine a suburb’s future potential with other factors and not just expect that historical growth will continue.
My daughter in law insisted me in passing an inspection before Ill buy a second house in Tampa. Holly Grail! If not I would have buyed a complete mess. That’s a good advice, for sure
Also consider that people who are new to real estate investing should always remember to have available cash reserves.
-John Biggel
I have seen so many people blow it on #1. Just because a house is cheap doesn’t mean its a great value… sometimes it really is just a cheap house.
kevin @ idaho real estate recently posted..Idaho’s Condo Life Style
I think it’s very important to spend more time on property research if the price seems too good to be true.
Properties are usually cheap for a reason!
relevant tips for today’s investor. Thank you.
I good friend of mine just bought a house for $40.000 but the house was a mess !! There is several thing to fix and the price was low but not worth is anyway…
Not even water was connected !!!
Great post. When in the second half of 2007 the property market collapsed, we learned so much that day. We cannot afford to make the same mistake again.
Greetings
Mary@Cursos a distancia recently posted..Estudiar cursos de marketing a distancia
I think a few years back I managed to make almost all of those mistakes at once. I bought cheap and didn’t get it checked out, and ended up selling less thanit cost me for everything. It was my first place though, so I’m glad I learnt my lesson early!
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I must remember us as when the property market was weak, there were increasing difficulties in real estate financing, as a result in particular of a level of risk provisions that had not been adequate.
We made mistakes but they have also done so.
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Yes, property research is the key. Don’t get caught unprepared … happened to me one time when I got lazy.
Word to the wise!
There are actually several reasons why people buy properties but I think we also need to give importance on what things we should get rid of to avoid mistakes.. And I really agree that “Not Getting Inspections Done During Purchase” is not a good idea. We have to make sure that the property is worth every penny we spend.
We often see several ups and downs in real estate investment. Just like any other business, buying and purchasing properties have risks of their own.One of the immediate mistakes a property investor commits is the impulsive decision to undertake a home rehab upon acquiring a house.
Isn’t this just the nature of the real estate market? Ups and downs?
What bothers me is the mentality you witness when people think that real estate is a sure fire investment. It is subject to market conditions just like any other investment.
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With property it is always “buyer beware” and proper advice and if it looks to good to be true it will be!!
I’m with you on the historical growth not indicating future success. It seems certain areas run out of gas as other areas become popular. It’s nice to be ahead of the shift.
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Good list of items to avoid. Hard to imagine anyone would purchase a home without a home inspection. If I may add one thing it would be to ensure the property being rented results in positive cash flow. Many investors will make the mistake of buying something and renting it for a loss after their mortgage, taxes, insurance and HOA payments, essentially subsidizing the housing costs of the tenant. I believe investors should be rewarded for taking a risk in form of monthly positive cash flow and to take all the risk and to lose money every month would seem like another huge mistake.
Finding the right property to begin your journey into property investment doesn’t have to feel like an obstacle. No, far from it. All it takes to get started is knowing where to look, and establishing if there is a rental demand to make it worth while. And we can guarantee you’re real estate agent will be more than happy to lend you a helping hand with that task.
Fair points, though popular areas, normally will remain popular and have a degree of safety by comparison to the upcoming areas. The most important factor is to make sure the deal you are getting leaves you in positive equity within the next 6-12 months term and also there is a strong rental demand for that type of property.
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Hi Investor,
Some good tips here, some I was familiar with but others are news to me. I like your blog, we are interested in invested in Australia but we aren’t quiet there yet.
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I certainly agree with your point that you cant just assume a property is a good investment just because it is cheap- there are so many other variables to consider. I don’t think there are any shortcuts in any form of investing- good research is always an essential element.
Being a real estate professional in Mississauga, Canada with a background in finance I see many of my investment clients doing a common mistake – waiting for the perfect property. the matter if fact is there realy is a perfect property and when there is, more than one party wants it creating a multiple offer situation bringing up the price. they wait for a great deal while their money is sitting in the bank. anyone who understand the “time value of money” also underands the fact that by wating for the perfect deal they are losing out on property appreciation they could be recieving from other properties. the perfect dream property rarley comes around.
Buying with an adjustable rate mortgage that is designed to blow up the payments 5 years from now.
Many investors will make the mistake of buying something and renting it for a loss after their mortgage, taxes, insurance and HOA payments, essentially subsidizing the housing
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property is a good business investment for the future, so many people try to looking a new land for their investment
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