News & Media

The 7 sins of property investing

We talk to seven experts about what they believe are the crucial mistakes when it comes to property investing.

A lot can go wrong when buying a property and the process isn’t always straightforward. To assist with making your purchase a little easier we asked seven experts including a mortgage broker, real estate agent and property lawyer what they believed were some of the biggest mistakes made by investors when buying real estate.

Mortgage broker

Investing in property is an exciting and potentially life-changing decision, Mortgage Choice spokesperson Jessica Darnbrough says.

“Assuming the right choices are made from the beginning, property investment could put you in a better financial position in the long run.

“One mistake buyers often make when purchasing property is becoming too emotionally involved and paying more for the property than it’s worth.

“Those buyers with a small deposit of five per cent to 10 per cent who will require mortgage insurance may run into difficulties having finance approved if they’ve paid over market value for a property.

“If a valuation comes in under what a buyer has paid, they’ll be left to come up with the remaining funds which can be particularly difficult with a small deposit and high loan-to-value ratio,” she says.

“When investing in property the key is to think with your head and not your heart. If property buyers ensure they only look at properties within their price range and stick to their investment strategy they should be on the right track to successful property investment.”

Economist/Accountant

Economist with Reality Economics Liam O’Hara says investors shouldn’t try to reinvent the wheel when buying property.

“When thinking about investing in property people generally have the attitude that they need a lot of money to start with, that it’s difficult or that they need a university degree,” he says.

“Additionally, they listen to negative people as there are always stories about the person who got caught out in some property scheme and lost all their money. Therefore they allow fear to stop them from even investigating their options in the first place.”

O’Hara offered the following advice to first time investors:

• Often investors don’t know their tenant. Investing starts with the tenant. In other words buy a tenant first, and then pay for the property.

• Investors also don’t claim all deductions under the law, so an accountant that really works for you is important, otherwise make sure you do your own research.

• Think about what can go wrong and insure against those unexpected events.

• Hold on to the property through tough times, don’t panic and sell too quickly. Remember it isn’t a get-rich-quick scheme, slow and steady wins the race.

Renato Sturma is a development finance specialist with All Financial Solutions and says as a financial expert he sees too many investors fail to consult their accountant about the best name to purchase their properties in.

“Always check with your accountant first as to the best structure and what name or entity your investment and loan should go in. Should you buy it in your personal name, company name or trust?

“Too often investors purchase a property before speaking to their accountant, then do their finance application only to find out later they’ve either put it into the wrong entity or another entity that would have served them better taxation wise,” Sturma says.

“At that point it’s probably too late to change it without additional, and sometimes expensive, costs to restructure the loan and the documents how it was meant to be, not to mention the lost time.”

Real estate agent

Jason Abbott, principal of PRDnationwide Coolangatta, says one of the biggest mistakes made by buyers is failing to do enough homework and research on the area they’re looking at investing in.

“They have exaggerated expectations on the returns they’ll make and often don’t have a clear understanding of the type of property they should be investing in to suit their budget,” he says.

Abbott reiterates Darnbrough’s sentiments that these mistakes are often a result of investors making emotional decisions rather than ones based on facts and figures.

“Being clear as to the type of investment – lifestyle enhancement, purely financial or a mixture of both is important.”

Abbott also believes investors make a mistake by not discussing the best financial strategy for their specific needs.

“Is a positively geared property or negatively geared property best for their financial position?

“Investors need to make sure they find out all of the expenses associated with the property such as council rates, body corporate fees (if strata titled), is land tax applicable, what will they need to allow for general maintenance each year etc.? What income can be generated from the property, what is the occupancy rate like for this sort of property and are there many vacancies of similar properties in the area?”

Insurance

A spokesperson for the Insurance Council of Australia (ICA) says research commissioned by the ICA showed more than 80 per cent of Australians were risking their homes and other valuable assets by not having enough insurance.

Property investors and landlords should consider how to protect their premises, its assets and the income they receive from their tenants, according to the ICA.

“They need to look specifically at the property they’re purchasing to determine what insurance policies they’ll need to protect their asset. For example, standalone properties will require home building insurance whereas strata properties won’t,” the spokesperson says.

The ACI says other points property investors and landlords should consider when looking at insurance are:

• Insurers may treat professionally managed properties differently than self-managed properties.

• Holiday properties may require a short-stay landlord policy.

• You can reduce your premium by taking out a higher excess.

• Check your policy to see if it covers contents inside the property that you allow your tenants to use.

• Strata insurance won’t cover you for the risks associated with leasing your unit or apartment.

• Think about using an insurance broker who can help find a policy that’s most appropriate to your needs.

Architect

According to Archicentre general manger Cameron Frazer, there are a number of mistakes investors make when buying property.

Archicentre conducts pre-purchase property inspections and many of these are requested by people who have purchased properties and after moving in discover major faults, many of which are related to illegal building, Frazer says.

"Archicentre Accredited Architects conducting pre-purchase property inspections have found a range of situations from illegal building to a lack of maintenance,” he says. 

One of the major problems for homebuyers is that many illegal building activities have been covered up or are in inaccessible areas such as under the floor or in roof cavities, which require an expert inspection to detect any problems, he says.

"However, all homebuyers should check the paperwork and permits of recent building additions or balcony and deck constructions before purchasing a home. Where new wiring and plumbing has taken place on a property, certification by qualified tradespersons should be available," he warns.

According to Frazer, some of the common illegal building signs uncovered by Archicentre Architects during pre-purchase property inspections include:

• The removal of interior load bearing walls during renovations causing sagging roofs and ceilings.

• Illegal plumbing connections and drainage causing damp and health hazards under the floor.

• Illegal wiring where the homeowner has added additional power points, extra wiring or light fittings.

• The addition of rooms in roof spaces without permits or appropriate support structures in the roof.

• Damp areas in the house through lack of ventilation.

• Tacked on additions which don’t look like part of the original home.

• Dug out areas under buildings with illegal wiring.

• Elevated timber decks and balconies which shake when walked upon.

• Damaged roofs (cracked tiles or old corrugated roofing).

• Damaged or broken guttering.

• Timber deteriorating or rotting due to lack of suitable care (painting/oiling).

• Water leaks.

• Structural deterioration in exposed areas such as decks, verandahs and pergolas.

Frazer says the harsh reality of the impact of illegal building for sellers is when they go to sell their homes and prospective buyers request the appropriate paperwork including building permits and documentation from licensed plumbers and electricians certifying work that has been carried out.

"The bottom line is that if the documentation can’t be produced then it becomes highly likely that buyers won’t want to inherit the legal or safety risk."

Valuer

Propell National Valuers state manager (Victoria, South Australia and Tasmania) Matthew Singleton says the biggest mistakes investors make when purchasing property is not doing enough research, buying with emotion and not seeking professional advice.

“Common mistakes include looking in a specific area, getting conditioned to pricing and market conditions then purchasing in an adjoining inferior location that’s assumed to be similar,” Singleton says.

“The investor should know the location and the asset drivers inside out. That is, know the level of demand – how many people are attending and bidding at auctions, clearance rates in the area and how long private treaty sales are taking to transact.

“Know the preferred location to infrastructure and facilities such as schools, transport, shopping, parks, CBD, beaches. Look at price trends in the area. Have values been falling, increasing, what are the drivers of this? What are the vacancy rates of locality?

“The more research and information known about the property and location will enable a more informed investment decision that will reduce risk and ensure that above market value prices aren’t paid.

“It’s all about return on investment so yield, capital growth and demand should be the key drivers of the investment purchase making sure the personal preferences of the investor don’t cloud the decision.

“Many mistakes can be overcome by engaging independent professional advice from a valuation specialist to assist with an investment purchase.”

Conveyancing solicitor

Solicitor and property law expert Tim O’Dwyer says investors usually make mistakes buying property when they’re pressured by an agent or are rushing to make a decision.

“In my experience it’s when an often over-keen and agent-pressured investor rushes in and signs a legally binding agreement without first obtaining sound, independent legal and taxation advice,” O’Dwyer says.

“A perennially critical issue, in my view, for both the property investor's solicitor and accountant is to determine (preferably collaboratively) with their client the person/s or legal entity to be the most legally-advisable and taxation-relevant purchaser of the proposed investment property.

“Before you sign anything you must ask the question – ‘who will be my buyer?’ Your solicitor and accountant will help you work out the best answer.

“Get it right, or it may come back and bite. Get it wrong and, at the very least, you may find yourself liable for double stamp duty.”

SOURCE: http://www.apimagazine.com.au/api-online/newsletter/14/january-newsletter/the-7-sins-of-property-investing

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