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Key takeaways
There is no real ‘secret’ to property investing success, but there is a strategy. If you follow the right location, the right price, the right plan, you can make sure your property investments outperform the rest of the market.
To achieve property investment success, you need to know the moves that will put your finances on the path to catastrophe.
Formulate a strategic property plan and stick to it. A property and wealth strategist can help you.
There’s no real ‘secret’ to property investing success, but as I’ve said many times before, there is a strategy.
There are so many articles around about how to make sure your property investments outperform the rest of the market.
The right location, the right price, the right plan…
Searching for the ultimate path to guaranteed riches is addictive… after all, we all want to reach the ultimate goal of financial freedom through passive income.
But the problem is, blindsided by the ultimate goal of guaranteed riches, many investors make many fatal errors.
Because with enough ignorance and misguided advice, you can lose money faster than in the blink of an eye.
And that goes completely against the Oracle of Omaha Warren Buffett’s most famous advice: “Rule No. 1: Never lose money.
Rule No. 2: Never forget Rule No. 1.”
So, if you really want to achieve property investment success, first you need to know the moves that are certain to put your finances on the path to catastrophe.
And then you need to know how to avoid them.
Here are 11 things you could do to lose money in property in 2024.
1. Ignore the location, location, location mantra
Location is the most important thing to consider when it comes to buying your next investment property.
Because the location of your property will do around 80% of the heavy lifting of its capital growth.
So ignoring this mantra could quickly put you in hot water.
Buying in regional Australia, in an area with below-average income growth, poor infrastructure or rising crime rates is a great way to make a substantial loss.
How to avoid losing money:
Follow the mantra!
Not all locations are created equal.
Like a monopoly board, the market is split into 4 different types of locations: discretionary, aspirational, affordable and last-choice locations.
Aspirational locations are where you should focus your efforts.
These are the upper-middle-class areas and gentrifying locations of our big cities which would also be considered A-grade suburbs.
These include suburbs where affluent millennials aspire to live as they move to the family formation stage of their lives.
When this wealthier demographic moves into a suburb they tend to push up property values and create a ripple effect producing economic, social, and cultural change.
Avoid the top-end discretionary locations – these locations are the established inner-ring suburbs of our capital cities or suburbs and while they would ordinarily be considered A-grade locations, their property cycle values are usually more volatile.
Certainly, avoid affordable or last-choice locations such as regional Australia which gives limited opportunity for capital growth.
Once you’ve chosen the location type, you then need to look for the right suburbs in that area.
And if you don’t know what you’re doing, these can be tricky to spot.
You’ll want to look for areas with good demographics, limited supply, strong employment opportunities, good infrastructure and amenities, good walkability to these amenities, gentrification and low crime rates.
2. Buying the wrong property type
Location is one thing, but the property type is also vitally important.
At any given time there could be over 350,000 properties for sale in Australia but in my mind, less than 4% are what I would call “investment grade”, so let’s look at what type of property a property investor should not buy.
- Off-the-plan properties: This might seem like an attractive option, but they usually set investors on an inevitable path to catastrophic disaster. These properties lack scarcity, have high body corporate fees and a low land-to-asset ratio which means they’re a poor recipe for rental and capital growth. Add to this the recent concerns about the well-publicised structural integrity issues in Opal Towers and many other buildings which have dampened investor confidence in the new apartment market and falling apartment values and you can start to see how the problem worsens.
- House and land packages: Like off-the-plan properties, house and land packages are a bad investment move. Most home and land packages are located on the outskirts of the city, in locations which have an abundant supply of land but therefore weak economic drivers and poor infrastructure. They also lack scarcity and therefore, offer minimal growth.
- Serviced apartments: These carry more risk than buying an ordinary apartment as you’re relying on the operator to get it right and on the tourism and business markets to remain strong to maintain occupancy. These properties have a limited resale market, and a limited letting market and often have expensive ongoing management costs.
- Department of Defense Housing and NDIS accommodation: While these properties come with the certainty of long leases and no ongoing maintenance, they have a limited resale market and hefty management charges.
- Small units, studio apartments and student accommodation: These have restricted markets because of their size, they also offer a limited scarcity factor.
How to avoid losing money:
Put simply, don’t invest in a property type that the bank is wary of.
And certainly DON’T invest in off-the-plan or house and land packages.
Think carefully about the property type that you’re looking to invest in and question its scarcity and potential for capital growth.
A good alternative would be to buy an established property that will outperform the market averages.
Ideally, you want to buy below its intrinsic value (which is why I avoid new and off-the-plan properties, which come at a premium price), with a substantial land-to-asset ratio and a twist (something unique, special, different or scarce about the property).
Finally, you want a property where you can manufacture capital growth through refurbishment, renovations or redevelopment.
3. Skipping property inspections
Not doing a thorough property inspection can lead to very costly surprises later down the track.
Structural issues, pest infestations and other hidden problems can quickly turn into a financial nightmare and turn a profitable investment into a financial drain.
Sadly, the trend of buying ‘site-unseen’ is taking off in some parts of the country as buyers become desperate to secure properties at an affordable price in a rising market.
We are seeing a lot of this in WA at the moment we’re even East Coast buyers’ agents asked the local selling agent or property manager to do a FaceTime video rather than inspecting the property themselves – REALLY!
And while they’re lured in by cheap prices, something much worse can be unknowingly waiting.
How to avoid losing money:
Attending property inspections in person or engaging a proficient buyers’ agent in that city – not one that flies in and out to inspect the property at the outset and throughout the sale process (such as for the pre-settlement inspection) is vital to ensure that you know exactly what you’re buying, and the condition it is in.
Never buy site unseen.
The property might look great in the video or online but there is a chance you can be stuck with a bad investment that causes significant financial stress due to and major loss of money.
4. Underestimating costs
Many investors make the mistake of embarking on property investment without fully understanding all the costs involved.
From fees, maintenance, inspections and even tax, there are many costs that can add up quickly and catch a poorly-educated investor off-guard.
How to avoid losing money:
Any property investment should begin with research, due diligence and a carefully formulated plan.
You need to be aware of all the costs associated with the property, including regular ongoing costs and unexpected ones, like damage to the property.
Landlord insurance can cover some costs, like tenants leaving or failing to pay the rent, and insurance on the building can cover things like storm damage.
But you’ll still need to have money set aside for things that aren’t covered by any insurance.
5. Taking on too much debt
It’s easy to do, but taking on too much debt can be catastrophic for your cash flow.
A simple mistake for novice investors is paying too much for their property, especially when buying at an auction.
By overspending, they will likely create cash flow issues for themselves (paying more stamp duty and extra interest for years) as well as having to wait longer for any decent capital growth.
It also means that if the property market takes a downturn or interest rates rise, that investor has taken on too much risk to remain resilient.
How to avoid losing money:
Start with your finances and cash flow – create an investment plan that includes variations for if your financial situation or the market changes.
You need to ensure that you can withstand changes in market conditions so that your investment isn’t at risk.
Keeping your debt-to-equity ratio in check is key to having a plan to manage the debt you do have firmly in place.
6. Ignoring legal and regulatory changes
Australia’s property market is constantly changing, with laws and regulations constantly evolving, and usually in favour of the tenants.
Ignoring these updates can lead to costly fines, and penalties or in extreme cases could even cost you your investment property.
How to avoid losing money:
At the beginning of your property investment journey, ensure that you’re up to date with all applicable rules and regulations.
Also, ensure that you routinely look for updates to ensure you have the most accurate information before making any investment decisions.
It also pays to work with a solicitor or conveyancer who is fully across rules and their updates.
7. Getting emotionally attached
Letting your heart rule your head is a deadly sin when it comes to property investment.
Trusting your “gut instinct” should never form the basis of a property investment strategy, however, buying a property is an emotionally-charged decision and inevitably there’s room for mistakes.
Property investors are riddled with emotional barriers including fear, indecisiveness, and procrastination which can lead to poor decision-making.
Fear of missing out, over-capitalising, pursuing the ‘perfect property’, blurring your purchase intention and/or objectives, and renovating to your personal taste are some faults that can lead to a financial downfall in the form of untenanted periods, low rental income, or limited capital gain.
How to avoid losing money:
Formulate a strategic property plan, and stick to it.
The property you eventually buy should be the physical manifestation of a whole lot of decisions you make this helps you formulate your plan and then initiate the strategies in the plan.
Of course, it helps to have an independent property and wealth strategist on your side like the team at Metropole.
8. Trusting everyone
Trusting that everyone is on your side and working with your best interest in mind is a guaranteed way to lose money.
Friends and family may have good intentions, but may not be experts.
Real estate agents work for the vendor, and most don’t own any investment properties.
Mortgage brokers may not understand the market enough to advise you on what an investment-grade property is.
Accountants don’t have an intimate knowledge of the property market.
Financial planners are licensed to sell financial products, but most aren’t able to advise on real estate.
Property marketers are salespeople selling a “product”; they are NOT on your side.
In fact, as they are paid by the developer you are the “product.”
Buyers’ agents are usually just order takers and don’t take into account your long-term strategy.
How to avoid losing money:
Be wary.
Many people who claim to be “experts” can be property sellers in disguise, so be careful who you choose.
Instead, find a trusted advisor who can help you devise a strategy to suit your financial situation and property investment decisions.
9. Underestimating property management
Managing an investment property requires a lot of time, effort and money.
Many investors underestimate how demanding it is and decide to take on the task themselves when they try to save money.
But this often leads to neglected management, unhappy tenants and lots of wasted time (and time is money).
How to avoid losing money:
Engage a professional property manager to help manage your investment property.
Property managers keep up with changing legislation that may affect you as an owner, make sure that insurance is current, and generally provide you with an extra layer of protection while ensuring that things run smoothly.
When it comes to getting the most out of your property, the multi-award-winning team at Metropole has very few peers.
Let us show you the Metropole Property Management difference. Leave your details here and one of our team members will be in touch.
10. Failing to diversify
Investors who put all their eggs in one basket run a risky game.
If the markets change, they could risk losing out significantly.
How to avoid losing money:
Consider diversifying your investment portfolio.
I’m not telling you to go and buy stocks and shares to balance out your property portfolio (although you could), you could also diversify by buying different types of properties in different locations and with differing financial and strategic plans.
11. Chasing a quick profit
Investors tempted by the promise of quick profits often make risky decisions.
Following speculative trends, unproven theories or promises of quick riches usually mean the exact opposite will be true.
How to avoid losing money:
Property investment is a long-term game and one that requires a focus on sustainable capital growth and a long-term plan for financial freedom.
Chasing short-term gains will likely only result in fast losses.
And no one sets out on their property investment journey to lose money.
You need to plan
So while the property markets will create significant wealth for many Australians, statistics show that 50% of those who buy an investment property sell up in the first five years.
And of those who stay in the investment game, 92% never get past their first or second property.
That’s because attaining wealth doesn’t just happen; it’s the result of a well-executed plan.
Planning is bringing the future into the present, so you can do something about it now!
Just to make things clear…buying an investment property is NOT a strategy!
It’s important to start with the end game in mind and understand what you need and what you want to achieve.
And then you have to build a plan, a strategy to get there.
The property you eventually buy will be the physical manifestation of a whole lot of decisions that you will make, and they must be made in the right order
That’s because property investment is a process, not an event.
If you’re a beginner looking for a time-tested property investment strategy or an established investor who’s stuck or maybe you just want an objective second opinion about your situation, I suggest you allow the team at Metropole to build you a personalised, customised Strategic Property Plan
When you have a Strategic Property Plan you’re more likely to achieve the financial freedom you desire because we’ll help you:
- Define your financial goals;
- See whether your goals are realistic, especially for your timeline;
- Measure your progress towards your goals – whether your property portfolio is working for you, or if you’re working for it;
- Find ways to maximise your wealth creation through property;
- Identify risks you hadn’t thought of.
And the real benefit is you’ll be able to grow your wealth through your property portfolio faster and more safely than the average investor.
Click here now and learn more about this service and discuss your options with us.
Your Strategic Property Plan should contain the following components:
- An asset accumulation strategy
- A manufacturing capital growth strategy
- A rental growth strategy
- An asset protection and tax minimisation strategy
- A finance strategy including long-term debt reduction and…
- A living off your property portfolio strategy
Click here now and learn more about this service and discuss your options with us.
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