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10 Common Property Investment Mistakes to Avoid

10 Common Property Investment Mistakes to Avoid

By Sarah Lefebvre on Jul 26 2018


Buying an investment property is an aspiration of many. When it is done well, it can set you up for a comfortable retirement, help fund school fees, holidays, and much more. However, as with every investment, there is always risk involved and, if you get it wrong, you could lose substantial amounts of money.

10 Property Investment Mistakes to Avoid 

1. Choosing the wrong ownership structure 

There is no ‘one-size fits all’ solution when it comes to structuring property investments because everyone’s situation is unique. However, many investors don’t spend enough time upfront planning the structure with their accountant and financial advisor, causing a great deal of trouble down the track.
 
There are four common ways to structure an investment. You can own an investment in:
An individual’s own name
Within a company
Within a trust, or 
Within a partnership. 

Determining the best fit for you is critical as issues can arise if you chose the wrong structure.  

For instance, a common issue relates to ownership versus asset protection. You may want to have complete control and ownership of an asset by owning it in your name.  However, if you are a director of a company and are therefore exposed to the director’s duties provisions in the Corporations Act, it may be better for you not to own the assets. Instead you could perhaps only have partial ownership or control over the assets, just in case you are sued.
 
It is paramount that you discuss your investment structure with your accountant and/or financial advisor early, as buying an investment property using the wrong structure can cause you problems down the track.

2. Failing to have a long term strategic plan 

Not knowing what you want to achieve with your property investment is not a good way to start. Many first time investors don’t consider their long term strategy. 
 
When working out your strategic plan, think about what you want to achieve and when, immediate cash flow, long term capital growth, ongoing income in retirement, and funding of additional investments to name a few. 

Make sure you consider the type of property, and how many properties you will need to buy to achieve your goals. You need to also assess how your current finances work within this plan – is it doable?
 
Make sure you discuss this with your financial advisor or accountant as they are the best people to help you here.

3. Not doing enough research and due diligence

Investments are big decisions, and they can go tragically wrong if investors don’t spend enough time doing their due diligence and researching the market. 

Many investors use property investment companies to help advise them on what and where to invest. Whilst this can help people who are unfamiliar with the process, it is still critical that the investor double checks any suggestions from the investment service. 
 
Make sure they provide multiple independent sources of price data and suburb information, so that you can verify what they have been told.  Once you have this data, do your own research. With so much data at your fingertips this is relatively easy to do.  

Here are some key data points to look out for:
  • The median price: Not just the current figure, but also how it has fared over the previous 12 months. Also, how does it compare to surrounding suburbs? An area that is significantly cheaper than its surrounding suburbs may indicate imminent growth.
  • Recent sales: Studying the most recent transactions will give you the most up-to-date information on prices in the area.
  • Vacancy rates: High vacancy rates can indicate a less desirable area, which could make it harder to find tenants and sell in the future
  • Future changes: If there are any scheduled or proposed developments in the area, you need to know about them. A new school or refurbished amenities could be beneficial to the area's value, while rezoning or commercial construction could be harmful.
  • Expert opinions: There are a number of professionals that offer tips on up-and-coming suburbs via blogs and market reports. Just be wary of any potential biases they might have.
  • Local council: Get in contact and see if there are any planned major council developments and infrastructure projects. While this may seem like a good thing at first glance, it is important to determine whether this infrastructure boom is a result of planned growth in the area, or whether the growth has already happened and the infrastructure is just catching up.

A final tip here – if you are using a professional investment service, make sure they provide everything in writing before you jump in and buy.

4. Forgetting about the tenants when buying an investment property

Before you buy an investment, remember that it is not the same as buying a home for yourself. When you are looking at buying an investment property consider every aspect of the potential property from a tenant’s perspective – what would they value, what would they pay more for?  

Whilst it is a good idea to like the property, you don’t have to love it.  What is more important is location; being close to transport and retail centres, schools, parks and universities will increase your rental value, as will a nice view.  Another factor to consider is the neighbourhood itself. Is it safe, do people want to live here, are there any rowdy neighbours in the area?

A major concern for many tenants, especially in the cities is parking – nowadays tenants expect double car accommodation. At the very minimum make sure you look for a place that has off street parking for at least one car.

Additionally, there are some added features that can make your property appealing to tenants:
  • Good quality kitchen
  • Air-conditioning / heating
  • Good quality fixtures and appliances
  • Quality blinds, shutters or curtains
  • Good cable connection for internet and Wi-Fi, a strong signal for smart phones, and multiple power points to facilitate simultaneous connections across a multitude of platforms
  • Pet friendly
  • Outdoor area

5. Borrowing too much money and not planning ahead 

Many investors can get over-confident when they have bought multiple properties – they think they are on a roll. However, refinancing can become an issue if the investor has borrowed to their limit. This is especially problematic given the tightening in lending restrictions.
 
If you borrow 95% you have no wriggle room when interest rates go up and rents don’t.
 
Additionally, if you are a couple, make sure you plan ahead for any changes to your income stream. For instance, if you are both working when you buy your investment property, but then one takes time out of the workforce, either voluntarily or not, you may end up not being able to pay your investment loan and being forced to sell before you want to. Factoring this in early can save heartache down the track.

6. Not adjusting rent to market conditions 

The market determines the appropriate rent and if you don’t take this into consideration you may end up pricing yourself out of the market. Tenants either won’t be able to pay their rent or you won’t be able to find new tenants to move in.
 
If your rent is too high, every month you spend trying to find a tenant who is willing to pay it means another month of vacancy and no rental income. Compromise is the key here and, as market conditions change in the future, there may be an opportunity to adjust your rent then. 80% of something is better than 100% of nothing.
 
On the flip side, rental markets can move at a faster rate than the buyer’s market.  Demand increases regularly. Ensure you talk to your property manager each year, compare the market, and ask if it is suitable to increase the rent. Keep in mind smaller annual increases are easier for tenants to absorb than larger scale increases.

7. Having the wrong insurance 

Things go wrong and properties get damaged or are vacant – some tenants willingly damage properties, whilst other residences fail to attract tenants for an extended period of time.  Not having the right landlord insurance to help cover damage and rental shortfalls can have a massive impact on an investor if they have to find the cash to make repairs or pay the bank back. 

Spend time researching the market and remember cheapest isn’t normally the best.

8. Not claiming all expenses and using a depreciation schedule

Many investors are not claiming all of their expenses including depreciation on the property, and therefore they are missing out on significant tax deductions.
 
Make sure you keep your monthly rental statements and invoices from your property manager, or ask them to provide you with a yearly summary of your property detailing rent received and expenses paid on your behalf. This summary must be given to your accountant.

If you renovated your investment, ensure you get a Quantity Surveyor to provide you with a Scrapping Schedule, or talk to your LJ Hooker Property Manager as we have a corporate relationship with BMT Tax Depreciation Specialist and they too can help.  You want to make sure you are claiming all relevant tax deductions for old fixtures and fittings that were thrown out.

Also ask your Quantity Surveyor for a Depreciation Schedule as this enables you to claim the lowering in value of add-ons within your property, or the property itself, which can be a great way to minimise your tax expenses and to maximise your return on investment.

In addition, make sure you get a loan statement from your lender and provide this to your accountant so they can calculate the interest paid on your loans.

9. Thinking you’ll save money by managing the property yourself 

Although many investors are financially-savvy, when it comes to finding tenants, dealing with day-to-day property issues or legal jargon, they are left in the dark.  Experienced property managers can help make sure you receive a reliable income stream, excellent capital growth and the best returns possible – as well as a guarantee of exceptional customer service.

A good property manager, like the team you’ll find at LJ Hooker, will provide you with regular and thorough property inspection reports, copies of all important documents, and conduct an annual rental review to help you achieve your investment goals.
 
A property manager costs approximately 7-10% of your total rental income, however the services and expertise offered by a good property manager is worth much much more than this fee, plus in many cases the agent’s service fee is tax deductible.

10. Not keeping and supplying all documentation to your accountant 

Not keeping good records can really impact your investment profitability.  Make sure you talk to your accountant about what documentation the ATO requires you to keep to support your tax return and claims. A safe suggestion is to keep all your receipts even if they are small, as it doesn’t take long for these to these expenses to add up.

Your accountant is the best person to determine what is claimable and what is not, so provide all information to them. Be careful not to lose any receipts, as misplacing them may mean you show a higher capital gains and therefore tax relating to it.

In addition to tax receipts, keep a logbook for any travel expenses relating to your investment property, and a documented or diarized account of any inspection trips to the property/s. Make sure you include the reason for the visit and the date.

Moving Forward 

Purchasing an investment property is a big decision. The acquisition of the property alone can be overwhelming, without even thinking about screening tenants to actually live in the property yet. The most important thing to remember is that a little bit of research can go a long way. Having sound real estate knowledge to make sure that the investment turns a profit, along with a detailed plan can make or break an investment. 

A lot of the things to avoid in the investment property space centre around not being suitably informed, failing to have a plan and lacking organisation skills. Fixing these small things could drastically improve the profitability of an investment property. 

If the idea of owning an investment property sounds appealing, yet the thought of all the work that goes into being landlords feels like too much, why not engage the services of LJ Hooker? LJ Hooker’s team of property management specialists can guide you through the process from start to finish, making the investment process that much more enjoyable. 

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