Are you thinking of investing in real estate? Here are common mistakes every beginner investor should avoid
Investing in real estate is one of the most popular ways to build wealth among Aussies. As a testament to this belief, the latest data from the Australian Taxation Office (ATO) revealed that there are more than 2 million property investors in the country.
And this end goal is no pipe dream. If you’re an avid listener of The Smart Property Investment Show, you know that there is no shortage of people from all walks of life who have achieved financial freedom (as well as long-term life goals) by investing in property.
However, winning big in property investing is easier said than done. Oftentimes, this investment journey is riddled with pitfalls that could waste your time, money, and energy.
So in this article, here are five most common mistakes to avoid when starting out on your investment journey.
1. Lack of planning
One of the biggest mistakes a beginner real estate investor can make is not setting specific goals from the start.
The simplest way to avoid this mistake is to have a plan before investing in property. If you’re buying a property for the first time, there are plenty of things you need to consider to make sure that your first venture will not tank.
When you’re on the drawing board, here are some questions that can help you get started on your investment strategy:
- What are your short-term and long-term goals? Do you want to attain financial freedom, get extra income or have an early retirement?
- What type of property would you like to purchase? Are you looking for a unit or a house? Should you buy an existing or new property? Or are you looking to get into commercial real estate?
- Where would you like to purchase your property? Are you buying within your local area or interstate?
- How will your first property fit in with your long-term goals?
- What is your investment strategy? Will you rent out your property, or will you flip properties for profit?
- How many properties do you envision having in your portfolio?
Of course, these questions are just barely scratching the surface, as you will need to take a more holistic approach when drawing up your investment plan by taking in your financial and personal situation. But asking these questions can serve as a good starting point for your planning process.
2. Failing to do your due diligence
When buying a car or a new phone, every savvy consumer knows it’s smart to compare different models and prices. They also ask a lot of revealing questions to determine if the purchase gives them a bang for their buck.
It’s important to understand that real estate investments require the same research method, as making data-driven decisions is one trait that most successful real estate investors share.
Some beginner investors make the mistake of basing investment decisions on recommendations from friends and family who lack expertise in the matter.
And while some investors do hit the books, they will not go beyond the listing information and make their decision without going the extra mile of doing their own homework.
For starters, make sure to do your homework on the following:
- Local market trends, property market cycles, hotspots, etc.
- Landlord-tenant laws in your state or region
- Zoning requirements
- Demand and supply
- Strata title (If you’re buying a unit)
Doing your due diligence in your research will ensure you make well-informed property investment decisions, so make sure to check out our Research page for reports, statistics and analysis from experts on the Australian property market.
3. Thinking short-term
Another common mistake that new property investors make is entering the market without any inkling of the kind of returns they can expect. They also overlook the time horizon needed to reap the return on their investment.
This mistake can be a costly one, as it could result in regrets and financial losses. With this, avoid thinking of real estate investing as a get-rich-quick scheme and look at it more as a long-term business investment that is sustainable and scalable.
Property investment is a long-term investment, and most seasoned investors will advise you to invest your money into a property with high capital growth potential, which will pay off in the long run.
4. Investing with your heart, not with your head
When buying your dream home, it’s understandable that your decision will be based mostly on emotion and will depend less on logic.
However, when it comes to investing, letting your heart rule your purchasing decisions is a common mistake that should be avoided at all costs.
Allowing emotional attachment to dictate your property buy could leave you with the wrong property, which may turn into a dud investment. Additionally, letting your emotions cloud your judgement means you are more likely to overcapitalise on your purchase, rather than negotiating the best possible price and outcome for your investment goals.
To avoid buying a property lemon, here are some tips:
- Base the decision on data. At the end of the day, investing is all about economics, demographics and finance and not emotions.
- Think like a tenant. If you’re planning to rent out the property, research what tenants will be looking for in a property and know the type of tenant you wish to rent to. For example, if you are looking to rent to families, look for a property in a good school zone with a safe neighbourhood and multiple bedrooms. Additionally, don’t forget to research local rent prices to know what tenants might be willing to pay.
- Avoid properties that require extensive maintenance. This is where keeping a clear head will be handy, as a buyer who is in love with a property tend to overlook its flaws. Always keep an eye out for major repairs or renovations when inspecting a property. Cracks in walls, damp basements and signs of pests are red flags that indicate the home will need maintenance and may require more money than you hope to spend.
- Invest based on your goals. As we’ve already mentioned, any property you purchase (whether it’s your first buy or any property down the line) should align with your investment goals. And while estate agents (or your heart) may try to persuade you to buy a property, if it’s not in line with your investment strategy, remember to stick to your long-term goals.
5. Underestimating expenses
In an ideal world, an investor’s only expense would be the mortgage. But as any seasoned investor would tell you, this is just the tip of the iceberg.
On top of the mortgage payments, beginner investors must also take into account maintenance costs, repair bills, and strata fees, along with other property taxes and insurance fees. And this is not yet the exhaustive list!
When investing in real estate, it’s a good idea to create a maximum limit and set aside a certain amount of your money for emergencies and unexpected costs associated with holding or managing a property.
Additionally, make sure your investments are financially sound. If you’re planning to rent the property, make sure to crunch the numbers for your cash flow and don’t forget to make the necessary preparations for when tax season comes so you can collect the tax deductions that are available to property owners.
Disclaimer: The information provided in the article is general and should not be perceived as personalised investing advice. It is highly recommended to consult with financial advice from a suitably qualified adviser.
If you want to learn more about the latest industry expert insights on the property market and other general information that will help you along your investment property journey, check out our amazing podcasts. Also, make sure to check our News section for the latest property market reports, insights, news and useful tips and strategies for investors.