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Ben Kingsley Blog post by Ben Kingsley

The 7 Biggest Property Investment Mistakes

If I were to ask you what do you feel more comfortable with, investing in shares or property?

The majority of people would say property.  The reason for this is because property is something that we all have experienced in our lives, so naturally we automatically assume we understand it better than shares or managed funds.  Shares on the other hand have unfamiliar terms like PE ratios, ROE’s Franking Credits plus given the size of some of these companies, their financials and business models are very complex which simply scares off most people because they cannot understand or comprehend the information presented.

Shares is often referred to as ‘paper money’, because all you own is a share certificate.  As for residential property, it’s a tangible asset or otherwise known as physical asset, meaning you can see it, feel it and inspect it.  Furthermore, it is familiar to us all as we have all grown up in some form of property and therefore it carries with it an emotional and ultimately an aspirational connection.

From a property investment perspective, there are good and bad aspects in possessing some property knowledge.  The positive side, having experienced property first hand and maybe having bought property over the long term they have gained some knowledge and comfort that has adjusted their mindset to consider property as an investment option.

No statement better sums this up than ‘As safe as Bricks and Mortar’.

However on the negative side those looking to invest often make very poor asset selection decisions because they do not understand what influences value and rental demand.  The biggest property investment mistakes are:

  • Buying with ‘Emotion’:  Far too many investors buy a new apartment in a developing area, because it offers something that connects with their emotions.  The classic example here is buying an investment unit in a tourist/holiday location.  The beach location, the dream of holidaying there, the bragging rights it gives them to friends and family.  Put simply, these locations are NOT investment quality areas and should never be considered as such.  The reality is the only people who make money (usually) in these locations are the developers!
  • Being ‘SOLD’ an Investment Property:  Buying on the recommendation of the selling agent or property marketer is fraught with risk.  When you read this it sounds pretty logical right? – “I wouldn’t be so gullible”, but when you visit the ‘flash’ display centres of the new stock on offer or when you are speaking to any sales agent, you need to remember that they are professional sales people and they will pitch all this important data your way to convince you that their offering is a compelling one.  And it sometimes comes laced with ‘independent valuer assessments’ for the new stock at least anyway.  Once again the reality is, they are paid to sell these properties to anyone who will listen, but whatever they say shouldn’t be taken as gospel, as it’s your money at risk.  You must seek advice from a Qualified Property Investment Advisor (QPIA) who’s completely independent of the so called ‘opportunity’.
  • Buying New over Existing:   You are possibly thinking I am an anti new property, as all of the first three mistakes have a negative ‘new property’ sentiment.  In truth this is not the case, some new properties do in fact make the grade as being considered an ‘investment grade’ property.  There are always pros and cons of buying off the plan apartments. However, it is critical that you understand that new property only represents about 3% of the entire market at any point in time.  So if you are only considering buying new ones, you are effectively locking yourself out of 97% of the market ‘opportunities’.  That’s just crazy thinking if you are looking to build wealth from investment/s.
  • Buying for a Tax Benefit:  Taking professional advice on legally reducing your tax is very smart.  You should always look to ensure you protect what’s rightfully yours.  However, don’t make your property purchasing decision based on a better tax outcome.  Tax benefits is one of the big selling points for any agents selling new stock (often they don’t have much else), and they package their selling angle around the idea that once the tax benefit is factored into the purchase, the property is only going to cost you ‘less than $50 per week to hold’ as an example.  You should care how much it is going to cost you to hold; you should care far more about how much it is going to grow in value.  If it doesn’t grow in value as well as say another property with less tax benefits does, then you are losing far more money than what a tax benefit will give you.
  • Being ‘Dictated’ in the property negotiation:  Buyers Agents are professionally trained in the art of negotiation and they also have a very sound understanding of the property legislation and transaction process.  Far more so than the average person who might buy a property or two in their lives.  By having this superior understanding they hold the upper hand in the negotiations and they can influence, lead-on and on occasion intimidate the buyer/s.  This usually leads to buyers paying far more than they should have for their purchase, and more often than not, they don’t even realise they have paid more than what the vendor was willing to accept. The sad reality here is I’m not talking one or two thousand dollars. In many cases it’s tens of thousands too much and when you factor in having to pay interest on this additional borrowed money, well you can see why it’s a BIG mistake!
  • Buying with a Short Term View:  Buying an investment property has some pretty steep upfront costs and they usually are around 5% of the price of the property. Then add the ongoing interest on the loan and you can start to appreciate the importance of the good returns, otherwise you are going to lose money, especially in the short term.  An investment property needs time for the power of compounding value to realise its true value as an investment asset.  If your situation is to change in the short term and you may be required to sell your property in 5 years or less, then generally speaking it may not be a wise investment for you now. In our business short term investing is 10 years or more, median term is 25 years or more and long term – well that’s never to sell so you can reap the full benefits of an income for life!
  • Not getting Professional Advice:  Let me bring you back to the start of this article re: Shares vs. Property.  You wouldn’t invest $300,000 or $500,000 into one particular share, would you, because you don’t understand them?  Well I often argue, although people think they understand property, hence they think they know what it takes to invest in property, the reality is most fail to understand what makes an investment grade property vs. what doesn’t.  With so much money at stake, you need to seek out the services of a Qualified Property Investment Advisor (QPIA) to help you better understand what you truly need to UNDERSTAND.  Don’t be too proud or too naive and put your or your family’s financial future at risk.

 

Until next month remember – knowledge is empowering if you act on it.

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