Buying a property with friends and family may seem like the ideal solution in an unaffordable housing market.
In reality, it’s riddled with risk and is just one of the big mistakes that investors routinely make.
Today we share the five big rookie mistakes and how to avoid them.
Buying a property with your best mate might sound like a good idea: half the deposit, half the risk and double the fun, right?
It’s all well and good while times are positive.
But what happens if your friend gets sick or loses their job, and suddenly they can’t pay their half of the mortgage?
This is one of the many considerations that would-be property owners fail to take into account when they’re excitedly planning a joint venture.
Jacob Duane, director of Bennett & Philp, a law firm that specialises in commercial litigation and real estate, stresses that relationships can often fracture after a poorly considered dual purchase.
He adds that although there is a long list of things investors should do when purchasing a property, there is an even longer list of what they should not do.
“These errors – many of which are easily avoidable – are sometimes mistakes that you might not even know about at the time, and they could potentially impede the success of any property investment. So, it’s imperative as a property investor that you do your research and engage qualified consultants who are working in your best interests.”
Following are the top five mistakes that property investors make, and how best to reduce the risk of these happening to you.
Mistake #1: Buying with friends and family
Purchasing an investment property with those who are closest to you could seem like a good idea at the time, but it might just turn out to be the biggest mistake you could make.
It may seem like the right thing to do: a solid way of getting a foot on the property ladder or growing your portfolio while minimising your financial risk.
But it’s important that you don’t assume everything will go as planned.
Property and finance expert Noel Whittaker says that when considering an investment partner you should look closely at the differences in your temperaments, ages and investment goals.
He adds that the potential for changes in circumstances, for example new relationships, a death or sudden unemployment, are also key considerations when weighing up a business partner – and make no mistakes about it, an investment decision is a business decision.
“Your best business partner is always the bank. All they ask is that you pay them interest,” Whittaker says.
Avoid this mistake by: Really thinking carefully before you invest with family and friends.
Investing with friends and family can result in a fire-sale outcome in which the vendors are left with no choice but to sell their assets at heavily discounted prices, usually because of financial distress. This kind of outcome can put serious stress on your relationships.
“I have seen these investments go sour numerous times, and it’s not worth the hassle,” Duane says. “To save you the money, time and stress, I would strongly recommend against it.”
Mistake #2: Not undertaking full due diligence
Failing to undertake due diligence correctly can have dramatic – and very negative – outcomes for property investors.
“At Bennett & Philp, we have a number of clients coming to us to cut corners and reduce costs in the due diligence phase by only focusing attention on the ‘relevant’ searches,” Duane says.
“From a lawyer’s perspective, all searches are relevant. Without inspecting the property, how do you know if that pergola has been properly constructed or if that commercial building extension is over an underground easement? What may appear relevant now could drastically change in the future.”
Duane adds that commercial properties carry their own unique due diligence risks. For instance, many infrastructure charges to the land are not discoverable through the standard searches.
“Often these charges are only identified after a standard or sometimes a full town planning search, which is significantly more expensive to obtain. A thorough investigation of all aspects of the property will enable an investor to identify possible risks. Of course, not all risks are discoverable, but the aim is to reduce your exposure to risks.
Avoid this mistake by: Committing to not cut corners. It may save you a few dollars up front, but at what potential risk?
“Your lawyer is just one consultant in the due diligence process – it’s vital that property investors work with a number of professionals from varying industries to mitigate any foreseeable risks,” Duane says.
“Considering this risk and your potential loss if a full due diligence is not undertaken should form part of your decision-making process.”
Mistake #3: Diving in head first without advice
Recently, an investor signed a contract to purchase a $14m shopping centre development.
The contract came with a seven-day due diligence period – half the standard 14-day due diligence period for commercial contracts – which put severe pressure on the investor’s legal team to cross all the t’s and dot all the i’s appropriately.
In situations like these, it would be ideal to engage a consultant or lawyer early in the process, as this would allow for more suitable time frames or terms to be established.
Working with consultants early on will also help identify any issues with the draft documents.
When it comes to purchasing a property in a self-managed super fund, for example, borrowed funds may only be used to acquire a ‘single acquirable asset’; multiple lots may, depending on the circumstances, require separate contracts and separate trusts.
The risks associated with purchasing a commercial property in an SMSF should also be separately considered by a practitioner with experience in superannuation requirements, as a general conveyancer may not have sufficient experience in those areas.
Avoid this mistake by: Engaging relevant support and advice so you’re not locked into unreasonable terms or unachievable time frames.
“Property investors need to extensively research not just the property but their advisors and consultants,” Duane says.
“Engaging consultants and legal advisors earlier in the purchasing process will ensure that any issues can be identified and ironed out before agreeing to unrealistic terms.”
Mistake #4: Failing at finance
Now more than ever it’s essential for investors to get pre-approval from their lender or bank before they make an offer on a property.
Furthermore, when you are approved for a loan and you receive the loan documents, it’s important to actually read and review them before you sign – or you risk being locked into a mortgage for several years that doesn’t suit your needs.
Consider interest rates, for example.
The loan you have applied for and are being approved for may have been advertised at a very low interest rate, attracting your interest.
“What people may not realise is that the cheap rate from one lender might be offset by the fine print, which could cause you financial distress in the future, with ongoing bank charges and break fees,” Duane says.
Legally, comparison rates must be advertised to try to combat banks and lenders misleading customers, but it’s still worthwhile researching the loan market properly to ensure you’re getting a mortgage that genuinely suits your requirements.
Avoid this mistake by: Working with a qualified mortgage broker who has specialist investment experience and can create a long-term finance strategy for you – one that will suit you well beyond this one property.
“It’s important to recognise that property investment is a long-term investment, and as such investors should use a financial product that suits long-term needs and goals as recommended by an experience broker and following careful review and comparison,” Duane says.
Mistake #5: Working with property spruikers
It often starts with a cold-call marketing introduction, or a free consultation awarded as a ‘prize’.
Next thing you know the investor has signed up for an expensive, junky investment ‘seminar’ that is primarily designed to sell them property flogged by the organisers for well above its market value.
“These marketing tactics may lead to other arrangements that are fraught with the possibility of conflict, such as meetings with a property spruiker’s related property agents, accountants, lawyers, bankers and so on,” Duane says.
It can be difficult to tell the difference between genuine advisors and spruikers, keep this in mind: advisors have an obligation to consider the best interests of their clients and to prioritise the client’s interest over the advisor’s interest.
The Australian Securities and Investments Commission released two reports in July 2018 specifying that the corporate watchdog would carefully examine the conduct of and any advice provided by one-stop-shop property spruikers.
“Not all one-stop-shop property spruikers do the wrong thing, and many are aware of their obligations to their clients,” Duane says.
“The risk is in the increased possibility of conflict and the reduced choices available or limited advice that may be provided.”
Avoid this mistake by: Asking questions and ding your own research.
“You can never ask too many questions when using a one-stop-shop property spruiker and their preferred associates,” Duane says.
True advisors are in a precarious predicament if they are pushing specific products and referring investors to certain associates for financial gain, so ask the hard questions like: What commission will you make on this sale? How are these properties valued? What track record do you have in helping other investors profit from property?
“Property investors should consider whether the advice being provided is on the basis that their financial position has been considered in all the circumstances, and if all services provided are in their best interest,” Duane says.
“It’s also recommended that you shop around and do as much research as possible. As a property investor you are not tied to a spruiker’s referred associates, and so it is absolutely crucial to your financial success do your homework.”
What stands between investors and success?
Your Investment Property asked Michael Yardney, CEO of Metropole Property Strategists about the big differences between successful and unsuccessful investors – here are his thoughts…
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