No one is an expert when they embark on a wealth building journey through property, but novice investors needn’t become pros the hard way. Sidestep these common mistakes, and you’re one step closer to success.
1. Not getting real on rental yield
Making decisions on gut feel instead of crunching the numbers is never wise when it comes to buying property. Calculating rental yield is essential because the answer will tell you if you can afford the loan you’re about to take out or not. Rental yield is the total income for the year over the purchase value of the property. It’s important to know this first . Seek out an investment in an area that has high rents compared with property values – that’s the definition of a high rental yield. Other targets to aim for are investments in high-growth areas and with low vacancy rates.
2. Relying too heavily on negative gearing
Current tax laws allow you to offset an investment property’s expenses against the loan if the costs are higher than the income you receive. There’s no doubt negative gearing can be helpful for investors, but taking it for granted is a mistake waiting to happen because there’s always the chance that it will be abolished. When working out if you can afford to invest, he suggests doing so as if negative gearing were not part of the equation, just to be on the safe side. “If you can’t afford to buy a property without negative gearing, you can’t afford it!” he says. Conversely, positively geared properties (where outlays are less than rental income) will attract tax that you’ll need to take into account.
3. Not taking into account all the costs
Maintenance and repair costs aside, buying property comes with a raft of expenses investors need to factor in to get an accurate financial picture. Like any property purchase, stamp duty and conveyancing fees come into play, but don’t forget about pest, building and strata reports and ongoing costs such as rates, property management fees, and insurance. Building and contents insurance is essential, but so is landlord’s insurance because it protects you from damage to property, theft and loss of rent if tenants stop paying. Income protection insurance is also advisable to ensure you can continue to pay the mortgage if you’re unable to work during those times when the property may be vacant.
4. Choosing a property subjectively
Putting yourself in the shoes of a tenant rather than imagining yourself living in an investment property is harder than it sounds, but more important than you may think. The easiest way to be objective about investing is to look for a property that will appeal to the widest possible range of tenants over a narrow segment of the market. A lock-up garage, spacious layout and plenty of natural light are features everyone appreciates.
5. Assuming the property will be rented out without a gap
Although your investment may well attract a good long-term tenant, counting on it isn’t wise. I say if you can’t service the loan on your own for 6-12 weeks while it’s vacant, reconsider your investment strategy. Many investors make this mistake and go into financial hardship. To minimise the chances of your property standing empty, look for neighbourhoods with low vacancy rates. A low vacancy rate indicates it’s a desirable area for renters, and will make the property easier to sell later.
6. Underestimating repair and maintenance expenses
When shopping around for an investment, consider the potential maintenance costs involved. Apartment buildings with a gym, pool or extensive landscaping may attract higher strata fees, and older apartments must be updated to attract good tenants. An apartment with a fresh and modern kitchen and bathroom, for example, will appeal to a larger pool of renters. Be prepared for the financial outlay that may be required to upgrade it to an acceptable standard.
LJ Hooker Avnu head of property management Nick Georges says the sheer availability of apartments means landlords can no longer get away with renting out a property in a poor state of repair. “All properties will show wear and tear from tenants, no matter how well they take care of the place, and it’s up to you to keep it functioning well and looking good between tenancies,” he says. “Plan to repaint an apartment at least every three years, and stay on top of repairs. LJ Hooker Avnu’s landlord portal makes it easy to get repairs taken care of quickly and affordably, and how much you’ve spent is a click away come tax time.”
7. Spending too much or too little on fixtures and fittings
“The more upmarket the area you buy in, the more you can expect to spend on appliances, flooring and lighting, but there’s no need to buy top-of-the-line everything,” says Georges. A quality appliance with broad aesthetic appeal is ideal, he says. “It’s about walking that middle ground between cheap and cheerful and over-the-top expensive. A good property manager will be able to advise on what to buy, as well as quality suppliers.”
8. Caving in when the market fluctuates
Although history shows that market corrections are typically followed by a recovery in prices – and that the overall trend is up – it can be distressing when an investment property loses value or looks like it might lose value in the near future. Unless you’re planning to improve a property and flip it in the pursuit of a quick profit (likely only in a booming market), the investors who do best out of property are those who can stay the course. Retaining a property for at least 7-10 years is usually a smarter path to take than selling when the market gets rocky.
9. Buying a poorly located property
Sydney is becoming a medium-density city as councils recognise the need for multi-dwelling buildings over single houses and relax their zoning regulations accordingly. “The rise in real estate prices over the past few decades means more people are looking to long-term apartment living rather than aspiring to the suburban dream of a standalone house on a quarter-acre block,” says Georges. “That means families, couples, retirees and single professionals could all be looking to rent your apartment… but not if it isn’t convenient to shops or public transport.” It’s another case of putting yourself in tenants’ shoes, and considering their needs. “Getting to work quickly and easily is going to be important to most tenants,” Georges says. Likewise if your investment is in an area with a high concentration of university students or families – the easier it is for tenants to get to where they need to go, the more in demand it will be.
10. Not considering the supply of apartments in the area
Look into whether any apartment developments are scheduled to be built in the area you’re thinking about investing in, Georges advises. “Too many in one area can lead to a drop in demand, which can impact both capital growth and the likelihood that your apartment will be without a tenant for longer or more frequent periods of time.” Have your lawyer or conveyancer find out about any potential new developments or zoning changes before you sign on the dotted line.
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