15 investment property mistakes you could avoid

By Nell Matzen  |  8 Dec, 2020

The current economic climate has caused a lot of Australians to reassess their financial situations, hoping to create a more secure future through wise investing. Australia’s record-low interest rates are tempting Aussies, young and old to buy their first investment property. Thankfully, government incentives, and low-interest rates, have ensured property has remained a viable investment despite the COVID19 pandemic. 

ING’s latest survey on the property market revealed that 44% of respondents still believe the property to be the best investment, and young people, in particular, are deciding to take the plunge into the investment pool. Buying an investment property can be a daunting task, so before jumping in head first, read our list of 15 investment property mistakes to avoid.

1. Listening to your heart

Buying a home is an emotional process, wrapped up in visions of your future. When purchasing an investment property, you need to base your decision on solid research and whether the property will fulfil your financial goals. Attaching emotion to a property can also lead to silly mistakes, like paying too much or missing glaring red flags.

A lot of buyers also fall into the trap of viewing their property as a potential holiday home, buying in their favourite sleepy tourist destination. Serious investors should avoid this route as holiday homes potentially have low growth and require a lot of maintenance.

2. You can be too picky and too cautious!

Budding property investors must do their research, but not at the expense of action. It’s a common-place for first-time investors to be too cautious, overloading themselves with research and analysis, and never pulling the trigger. There are endless opinions, facts and figures, but you can still make a solid investment without becoming an expert. 

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3. Forgetting depreciation

Property depreciation tax allows investors to offset their property’s decline in value against their income. The depreciation tax covers both the building’s structure and fixed items like appliances and blinds. Putting depreciation tax in the too hard basket could mean potentially missing out on thousands in returns. It’s a relatively straightforward process, which requires hiring a qualified surveyor to inspect the property, who will then create a report for your accountant.

4. Lack of research

Investment properties require a little more research than owner-occupied homes, as it’s vital to fully understand the property and area to ensure you’re making a good investment. Utilise up to date suburb information and price data to make sure you’re getting the best deal that will also give you good returns. And don’t forget pest and structural reports to avoid any potential nasty costs in the future.

Conducting multiple inspections of the property will ensure it’s an attractive place for tenants to live so you can expect steady rental revenue. Take note of surrounding utilities, natural light, traffic noise, etc.

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5. Asking your real estate agent

Agents aren’t the enemy, but they are there to sell you a house. It may seem tempting to take their advice, but at times it’s just a sales tactic dressed in sheep’s clothing. Real estate agents will be less than eager to highlight any issues with the property, but will often divulge the information if asked directly. Ultimately, estate agents are there to highlight the best features of a property, so independent research and inspections are vital to getting the full picture.

6. Self-managing your property

Self-managing your rental property may seem like a great way to save money, but in reality, the effort can potentially outweigh the financial gain. Property management fees range from 5-12% of the rent, depending on where you live. These numbers might seem steep, but the fees cover 24/7 maintenance requests, dealing with tenant complaints, collecting and chasing rent, marketing your property and inspections. Once you start expanding your portfolio, managing multiple properties can potentially turn into a full-time job. 

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7. Assuming low-interest loans will be the best value

Low-interest rates aren’t the Holy Grail when it comes to an investment property loan, as they are sometimes offered in place of other features that are helpful to investors. No break fees, no caps on extra payments and the ability to redraw on additional repayments can potentially save you more than low-interest rates, depending on your financial strategy. And don’t forget, interest rates paid on investment properties are tax-deductible.

8. Expecting unreasonable rent

Don’t shoot yourself in the foot by leaving your property empty waiting for a tenant who’s willing to pay a higher rate. Forgoing $20, or even $50 a week, will potentially have a much smaller impact on your yearly rental income than leaving it unoccupied for months. This is especially relevant in the current rental market, where low occupancy rates mean tenants have the upper hand.

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9. Buying the wrong property

Choosing the ‘right’ or ‘wrong’ investment property is more complicated than it sounds. An ‘investment-grade’ property can offer steady capital appreciation and rental income, by remaining in strong demand by tenants and owner-occupiers for the life of the investment. You can identify an ‘investment-grade’ property through solid research or seeking the advice of a professional.

If you plan on taking advantage of property depreciation tax, only houses less than 40 years old are eligible.

10. Poor financial structures

Every structure will be different as every investor has a different profile, so it’s best to speak to an expert finance broker or financial planner as banking lending officers usually do not have the skills needed for this type of structure.

The reason expert finance brokers are the way to go, is because they specialise in structuring loans for multiple property investors. For your financial structure to thrive, your broker will need to understand how taxation works and how to optimise cash flow with the investment and also with your pre-existing mortgage.

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11. Bidding wars or auctions

Auctions can be emotional and exciting, and can potentially leave you spending more than you had budgeted. Competing for an investment property with a particularly keen buyer is another path to paying above the properties actual value. Whatever the avenue for sale, keep your budget and the property value firmly in your mind.

12. No financial strategy

A solid financial plan is vital to achieving your investments goals. Lacking a financial strategy doesn’t necessarily spell disaster, but it could prevent you from getting the most out of your investment. Before you start looking for properties, decide on both your long and short-term goals, determine whether they are realistic, and identify any potential risks. Answering these questions will then help you choose the right location and property type. 

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13. Over borrowing

Over borrowing can quickly turn an investment into a big problem. Even choosing to borrow the maximum amount your lender will allow creates possible risks, leaving little wiggle room if interest rates rise and rents remain stable. Choose your budget conservatively and stick to it.

14. Stagnant rent

Rental increases, especially in major cities, are more common than most would-be investors realise. To avoid losing potential rental revenue, and scaring away your tenants, raise your rent yearly and in small increments.

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15. Not getting professional advice

Ultimately, buying an investment property can be a daunting task. An industry professional can help you create your financial strategy, determine whether a property is ‘investment-grade’ and help you avoid costly mistakes. For most people, it will be the largest investment they make, and professional advice can help them make the right choice for their financial goals.

Words by Nell Matzen


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