I’m a big believer that property investment can be a worthwhile and rewarding experience.
Financially, it can provide excellent longer-term returns through capital appreciation while the monthly rental income can help offset property holding costs.
Personally, you can get a lot of satisfaction and comfort knowing that if you’ve invested wisely your property can provide future financial security for you and your family.
However, all this doesn’t necessarily mean you must, should or are ready to become a landlord and undertake what may well be the biggest investment decision in your lifetime.
With ongoing media coverage about the level and direction of property values, strong auction clearance rates, strong median price growth in the major capitals and of course targeted marketing campaigns espousing the benefits of being a property investor, it is easy to get caught up in the excitement and opportunities this type of investment promises.
In addition, many potential investors may harbour the fear of missing out, which property marketers attempt to exploit.
Their argument goes along the lines that if you don’t buy now, you may miss out forever.
However, my advice is don’t get sucked-in by this marketing hype.
Before you commit to becoming a property investor (and I say commit because normally you’re looking at a 7-10 year investment timeline) here are ten warning signs that you might not be ready…
1. You haven’t set your investment objectives
Don’t be a lemming and buy an investment property because that’s what others are doing.
You should be clear about why you’re investing and what type of return you’re after. You also have to be ready, willing and able to take on the obligations of being a landlord.
The dangers of not being clear on your objectives include:
You may choose the wrong property
Select the wrong loan product
Not know when to sell
And as result of the preceding points, you could lose money
2. You haven’t researched the market
There are many factors to consider when selecting a property and you should research these by property type and location.
Without adequate research it will be difficult to identify and choose between properties most likely to deliver your investment objectives.
Factors you need to consider include: capital growth potential, vacancy rates, rental returns and the cost of ownership.
Speaking to local selling agents, reading property articles and news feeds and subscribing to property reports from independent research organisations (like www.onthehouse.com.au) are great ways to improve your knowledge and understanding of the markets you’re considering buying into.
3. You’re convinced property investment is a sure thing
I hate to burst your bubble (no pun intended) but there is no guarantee that investing in property will meet your financial expectations.
Prices can go down as well as up and they can remain flat or stagnant for many years.
And remember, the property market can be broken down into various sub-markets including: national, state, suburb and street markets, all of which may interact with and diverge from one another (positively or negatively), depending on what’s happening from a macro or micro economic perspective.
Never assume that investing in property is the right thing to because the only way is up.
This is certainly not the case.
4. You don’t understand your legal obligations
When you invest in residential property you’re not only taking on the financial commitment of a long-term loan, you’re also taking on a number of legal responsibilities.
Some of these include being a landlord, certain tax and reporting obligations or those of a company director if you purchase your property through a separate incorporated entity.
Importantly, you must be aware of all your legal obligations to ensure you comply with the law because if you don’t, the consequences could be severe, such as being hit with a fine or worse.
5. You haven’t set a realistic investment time-frame
Don’t invest if you’re looking to make a quick buck.
Sure you may have heard stories where lucky investors have managed to “flip” (that is buy and then quickly sell) a property within a relatively
short period of time and make a profit (after taking into account all purchases costs including stamp duty), but these success stories are few and far between.
And I think they’re more likely to arise from good fortune rather than necessarily good buying.
As mentioned above, you need to view your investment as a medium to long-term one – at least five years and more likely closer to ten.
This investment horizon provides the time needed to recover your upfront purchase costs (which can add additional costs of anywhere between 3% and 7% to the purchase price) and provide the time needed to ride out any downward trends in the property cycle.
6. You don’t understand property cash flows
If you don’t understand the quantum and timing of your investment property’s cash flow then you’re asking for trouble.
There are numerous stories of highly geared investors getting themselves into financial difficulty because they’ve taken on too much debt and eventually discover they can’t afford to meet their ongoing financial commitments.
And this situation can be exacerbated if they’re negatively geared or if there’s a reduction in their household income where a reasonable portion of that income is needed to support their investment.
So don’t proceed until you’ve prepared a cash flow budget that you understand and that indicates you can afford the investment.
And make sure you flex it to see what would happen in a worst case scenario.
I would also suggest you set up a reserve fund to be used to help cover the unexpected – like an unforeseen major repair bill.
7. You’re not sure how much you should pay for a property
There are two big risks if you don’t know what you should reasonably offer for your investment property.
First, you could end up paying too much (which costs you money) and second, by paying too much you could adversely affect both the level of growth and quantum of any capital gain you hope to make.
In addition, it could add years to your investment timeline whereby you have to wait for the market to catch up to the price you paid, as well as cover all your acquisition costs.
So never put in an offer or sign on the dotted line unless you have a reasonable understanding of what a property is worth.
This is where doing some legwork by attending open houses and auctions, speaking to local selling agents to get a sense of value and subscribing to independent property reports can pay real dividends.
8. You think negative gearing is a way to make money
This is another marketing ploy used by spruikers.
Their argument is you can reduce your tax bill by losing money.
Let’s just think about that for a moment……
You don’t make money by paying less tax as a result of a negatively geared property.
You only make money if you’re able to sell your property for more than you paid for it plus (hopefully) what you paid out in interest and other costs less the rent you received over the period you owned it.
So you should think very carefully if the only way you can afford to buy an investment property is to lose money.
From a loan affordability perspective, ask yourself this question, “What would happen if I lost my job or a big unexpected bill came in?”
Just remember that if you can’t meet your ongoing investment property mortgage payments the benefits of negative gearing go right out the door.
9. Your don’t have the right investment structure in place
If you get this wrong it could adversely affect your personal tax situation including capital gains tax, the property’s overall investment returns and otherwise undermine the achievement of your investment objectives.
It’s therefore important that you focus on things like ensuring your property loan supports your investment strategy and that structure used to buy the property meets your personal, family and of course taxation needs.
10. Going solo
We’ve looked at nine examples where things can wrong, and thinking you can do it all yourself is example number ten.
There are plenty of traps you need to steer clear of, whether you’re a novice or even a more experienced investor.
For instance, you have to be across issues and risks encompassing: financial, property, tax, accounting, legal, insurance and even estate planning matters.
Just bear in mind it takes years of training and experience and in most cases requires academic and professional qualification to be able to understand and/or provide advice on these matters.
You need to ask yourself, do I know everything I need to know?
For most of us the answer is likely to be “no”.
This is why you should always seek independent and unbiased advice before you inves