The 7 mistakes that property investors make

The seven mistakes apply to any property niche; it does not matter if you are a vendor financier, a landlord a renovator or a developer. The seven mistakes are;


  1. Not getting the right advice or worse still taking advice from people with zero experience. How often have you heard a story that goes a lot like this, the uncle three times removed, once owned an investment property and everything that could gone wrong did go wrong. The tenants stopped paying and just before they abandoned the property they trashed it and then as soon as it was repaired it burnt to the ground. Yes, things to go wrong, however if one has seeked some good advice and education on property investment it would become apparent that you can mitigate many risks associated with property investing. For example, you can get landlord insurance that can cover rent default, malicious damage and building insurance in case of fire. It is not all doom and gloom, property investment is a skill and takes the correct advice and education to hone it.


  1. Shopping around for finance – it sounds like a good idea but what is really happening is that your credit report is now starting accumulate “footprints” of all the lenders that you have approached. This then impacts the decision of the lender that you finally decide to work with, many loans get refused purely on the basis of too many credit enquiries. Employ an experienced mortgage broker to make enquiries for you that will not impact on your credit report. A mortgage broker has the ability to go in behind the scene and make all the enquires you need without the enquiry being recorded on you your credit report. Obtaining credit has become quite complex, leave it to the professionals do a good job for you.


  1. Not correctly structuring finance – Many lenders will “cross collateralise” the properties which means that the collateral from one property is used as collateral to acquire another loan for a property. The impact of having the properties crossed is that the acquisition of more properties becomes quite difficult. You are also at the mercy of the lender that has all your business. If you want to use the equity of your current property to buy an investment property, the best structure is to open up a line of credit for the equity that you wish to tap into. For example, you own a property that is worth $500,000 and you currently owe $300,000 on your home loan and you want $100,000 released so that you can put deposits down and pay closing cost for the new purchase. One of the best structures is to have the loan “split”, $300,000 remains usually as a principal and interest reducing loan, and the split loan is a line of credit loan. That way you have separated the non-deductible debt (debt that cannot claimed as an expense on your tax return) from deductible debt (debt that may be claimed as an expense on your tax return). If you simply “top up” the $300,000 home loan to $400,000 there is no clear line between your non-deductible debt and your deductible debt.


  1. Too much debt and not enough debt reduction – All too often people get excited and want to gear or leverage their properties to dangerously high levels without any thought as to how they are going to reduce the debt. The thinking here is that they are hoping the properties will increase in value and eventually payout the debt, but what if the properties do not go up in value? Interest only loans, whilst they are a great tool for growing a property portfolio, there still needs to be some debt reduction component to the overall portfolio. The first debt that needs debt reduction is the non – deductible debt or better known as consumer debt, usually home loan, car loan and credit cards. Refinancing and wrapping up your car loans and credit cards into home loan sounds like a good idea as most people like that the monthly repayment will be reduced. Think about this, if you wrap up your maxed out credit card with last night’s dinner on it you will be paying last night’s dinner back over 30 years! A properly structured debt elimination plan is always a much better choice than just simply wrapping up debt every few years, you will never own you home doing that. It also indicates that you are living beyond your means, and you need to address the amount of spending not cover up the bad habit with constantly rolling up bad debt into your home loan.


  1. Using your current bank for all your needs – You may have been a client of a bank since you were 5 years old when your parents set you up with a little bank account to get you in the habit of saving some money. Eventually you grow up and you want to buy your first home so you naturally go to the bank that has your saving account to approach them for a loan. The big mistake here is that no two banks are the same, on the outside looking in they appear to do the same thing. If you are an aspiring property investor you want lenders that can meet some specific criteria on your proposed purchase. You don’t want to be locked in to one banks policy you want flexibility to use different lenders to take advantage of good lending deals.


  1. Buying a property on emotion and not the numbers – Emotional buying often does not have a good ending. When buying an investment property, the numbers have to make sense. If you buy the property on the basis that it had a beautiful bathroom and a delightful kitchen, you will more than like pay too much for the property. You are never going to live there so the beautiful bathroom and delightful kitchen should never be the decision trigger. The rent or the yield and the capital required to purchase the property become the most important criteria when buying an investment property. Followed closely by the location, and the infrastructure to support the proposed occupant. The numbers never lie, if the deal does not make sense to you don’t buy it, there will always be another opportunity that comes along that will suit your buying criteria.


  1. Fear causing analysis by paralysis – The level of complexity is high when it comes to property investment and the amount of education on various different property investment niches is prolific as are opinions on the best way to make it. Getting clear on your property niche is vital to success. Do something you are going to love. I personally love the vendor finance niche as it involves structuring a deal to give someone a homeownership opportunity. I am definitely not a renovator, the whole idea of ripping up smelly carpet and painting does not excite me one little bit, so I avoid that type of niche. I have complete admiration for people that do it and do it well, the big message here is that you have to love what you do and it will come easily for you. Procrastination usually shows up because the person is either not clear on what they need to do or it is not high on their values list. I often hear “I just need to do more research” before I put in my offers or all the good investment properties have all gone or the timing is not just right. The reality is that these are some really good justifications for not moving forward, just know that when you are in this space the underlying emotion here is fear or as many people say fear is the acronym for False Evidence Appearing Real.

The numbers don’t lie

Buying an investment property is not about guessing if it will make you money or not. Being clear on what type of property niche you are working in and how much you expect the property to make will ensure that the property meets the objective making money. Once you are clear on the specifics of the property it makes communicating with agents a whole lot easier and they can be on the lookout for properties that suit you.

If your sole objective is to reduce your tax and that is the only objective you have, you will lose money, for sure. Many people are sold on the idea of saving tax when they buy an investment property. In order to save on tax, you have to lose money on your property investment. The strategy is known as negative gearing. The Australian Tax Office allows you write off any of the losses you have on your investment property against your personal income. Sounds good but is it really? As an example, let’s say you are earning gross $100,000 annually and your tax rate is 35 cents in the dollar, your tax bill for the year is $35,000. Your investment property loses $10,000 in the financial year. For the calculation of the tax, the $10,000 loss is deducted from your gross income of $100,000, making it $90,000, the tax is then calculated on $90,000 making the tax bill $31,500 instead of $35,000. You meet the objective of “saving tax” of $3,500 however it cost you $6,500 to save $3,500.

This is the crazy part, the property has cost you money, and that money comes out of your pocket. Some people argue that the capital growth of the property will exceed the losses. Sometimes it does and sometimes it doesn’t, at the end of the day this is a hope and pray strategy. All too often I see people with 4 or 5 negatively geared properties because they were sold on the idea of “saving tax”. You only have to have one small thing go wrong and it puts enormous pressure on you personally and can force you into a sale that may not be convenient.

If your objective is to make money, look at a property from its income earning potential versus the capital outlay. I have seen too many investors get caught up with the price of the property instead of looking at the return on the property. They are so focused on the actual price they forget about the return.

You can very easily do a “back of the envelope calculation” that requires finding out what the weekly rent potential is versus the value of the property.  If you want to achieve a 5% return you would look for a property where the rent is the same as the first three digits in the purchase price. For example, $400,000 house rents for $400 per week it is roughly a 5% return. In fact, it is really 5.2% ($400X 52 ÷ $400,000) = 5.2%. Try it – it works! Given that interest rates are at an all-time low it becomes easier to seek a neutral or positive cash flow on the property.

If that same $400,000 property only earned $300 per week it would only be a 3.9% return. If the interest rate on your loan is 4.5% you are in a losing proposition from day one. The good thing about a very simple calculation it allows you to sift through and sort out the properties that you may consider buying.

Saving tax is a very poor reason to buy an investment property. The numbers don’t lie, and you can always rely on them. Understanding the numbers on a property combined with some solid market research should yield you a return that you are seeking. Armed with this information you can sit down with your accountant or financial planner and get the appropriate advice to move forward building your property portfolio.

Happy investing

Felicity Heffernan