A few home truths about building a home and all that surrounds it.
Thinking about buying or building an investment property?
The prospect can be exciting and nerve-wracking all at the same time, and you want to be sure you’re making sound investment decisions right from the start.
General Manager of FinancePath Chris Collard helps ease the stress and instil your confidence by sharing the seven common property investment mistakes he commonly sees people make, and he tells us how you can avoid them.
Mistake 1 – Not understanding your investment purpose and goals
The first mistake Chris says many people make is failing to understand their purpose or goal when choosing to invest in property over other options such as shares or bonds. The question Chris asks his customers is: “Why are you looking to invest in property, and what is the financial outcome you are expecting?”
“If you can’t answer these questions, then you aren’t investing in property for the right reasons, and there is a large range of other investment decisions you could be making instead.”
The answer Chris typically hears is that people want to secure their financial future, but he says it’s important to break this down and understand what financial security looks like for you personally.
“For some, financial security means getting to a point where they can replace their income, for others, it’s about having enough money for a comfortable retirement. Understanding your purpose is about not only identifying your goal but also knowing at what point you have achieved that.”
“I recommend finding someone skilled enough to ask you the right questions and help you work out your purpose because property investment isn’t always right for everyone,” says Chris.
Mistake 2 – Not fully understanding your current financial situation
The next mistake people often make when considering an investment property is not having a clear picture of exactly where they are at financially and what their position might be in the future. Often, maximum borrowing capacity is confused with realistic borrowing capacity.
“Anyone can use an online calculator and find out what their borrowing power is, but that really is totally irrelevant,” says Chris. “The question is how much can you afford while maintaining your lifestyle and ensuring you can sleep at night, particularly if your circumstances change over the next five, 10 or 20 years?”
“The realistic borrowing capacity for a young married couple looking to start a family will be very different to a couple with three kids who are about to embark on paying private school fees, or a single person looking to buy a retirement investment.”
Property investment is an expensive exercise, not just because of property prices but because the entry cost into owning property can be costly.
“Stamp duty, mortgage fees and insurance are expenses that people often forget to factor into the cost of buying an investment property, and these costs can take a number of years for you to recoup,” says Chris.
“As a general rule it will cost you five per cent more in government fees and charges to secure a property than the property is worth, so you’ll need to ensure you’ve factored these into your calculations as well.”
Mistake 3 – Not understanding your (and your partner’s) money psychology
The third big mistake that people make when buying or building an investment property is they don’t understand their money psychology, or they don’t align with their partner’s psychology.
“You need to understand if you are comfortable being a risk taker, a conservative investor or if you fit somewhere in the middle. How much risk are you willing to take on?”
“The next question is if you have a partner you’re investing with, are you on the same page when it comes to your purpose and goals, and how you will go about achieving these together?” says Chris.
“If you are a conservative investor who is partnered with an aggressive risk taker, this may affect the type of property you buy. There’s no point in progressing to looking at properties until you understand if your partner is willing to take on the same amount of debt as you to achieve your goal.”
Mistake 4 – Not planning your investment strategy
Another mistake people often fall victim to is failing to spend time considering the strategy and structure of their investment. You should be asking yourself questions like where do I borrow the money from, under what entity do I borrow the money, and is my loan going to be interest only or principal and interest?
“There is no one-size-fits-all when it comes to loan strategy or product. The type of product and repayments (fixed or variable interest rates) will largely be determined by your own personal circumstances.”
“If you understand your purpose and goals, your current financial situation, and your money psychology, deciding what investment strategy is best for you should clear,” says Chris.
Mistake 5 – Using your heart, not your head
When it comes to deciding the type of investment property you want to build or buy, people often make decisions based on emotion which Chris says is a big no-no.
“When buying an investment property, it’s critical to not take the same emotional approach as you would if you were buying a property to live in,” says Chris.
“You need to look at the type of investment property that will achieve your purpose and goals. There are many options to consider, such as buying an established house, buying a house and land package and building, buying off the plan, and knock down rebuild a dual occupancy. It’s important to understand the pros and cons associated with each investment decision and how those relate to your desired outcomes.”
Mistake 6 – Not getting adequate protection
Many Aussies tend to have a ‘she’ll be right’ attitude when it comes to a lot of things in life, but if you’re going to invest in property, you need to think about the ‘what if’ scenarios and protect yourself again these.
Chris points out that protection doesn’t just mean protecting the investment property itself, although insurance is a must, but also personal protection for loss of income or death.
“If you understand your worst-case scenario and protect yourself against this, then you’re are limiting the barriers to make a sound investment decision.”
Mistake 7 – Not seeking professional advice
Chris explains that he is surprised that so many people believe that buying an investment property is something they should be able to do themselves, but this is a mistake, and he recommends seeking help from a trusted advisor.
“Deciding to invest in property is one of the biggest and most expensive decisions most people will ever make in their lives, so why wouldn’t you get advice?”
Metricon has a team of consultants who can guide you through the investment property building process. Call 1300 786 773 to learn how to make your investment dreams a reality.