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.

Why regulators are saying ‘NO’ to interest only loans?

In the past, anyone could elect to have an interest only loan – this is not the case anymore. Just because you ask for an interest only loan does not mean you will be granted an interest only loan. The regulators are worried about risky borrowing behaviour and have asked lenders and mortgage brokers to step up to make enquiries into the reason for an interest only loan.

A common strategy for property investors is to ask for an interest only loan, typically for up to 5 years. This gives the investor an opportunity to keep the initial contractual payment low for the first 5 years to allow for a natural increase of rental income and better cash flow to meet outgoing expenses. This makes perfect sense and a great strategy to manage cash flow.

What the regulators are concerned about is, the amount of interest only debt in an individual’s portfolio versus the amount being paid down. The risky behaviour is when an individual has a high percentage of their debt including their personal home loan debt as interest only and no clear exit strategy to actually pay off the loan. It has been common in the past for investors to “rent” the money with a hope and pray strategy that the properties will increase in value. There is no guarantee that all properties will go up in value.

It is very easy to get caught up with the lower interest only repayments, however when the interest only term expires the loan will revert to principal and interest and you then only have 25 years instead of 30 years to pay off the loan. This can hurt if a property investor has several properties on interest only and they start to roll onto principal and interest.

Ideally, paying down the owner-occupied debt (non-tax-deductible debt) first is a good place to start. Market research is critical when acquiring investment property, part of that research requires looking at the numbers, and how the cash flow works on the whole portfolio. Formulating an exit strategy to eventually have the debts either significantly reduced or paid off needs to be a consideration.

There can be good justification in some cases to have the owner-occupied home on interest only scenarios such as renovating a home or building a home. A borrower may want to keep the contractual payment low for a period of 12 months so that maximum cash flow can be funnelled into the renovations. If building, people are often renting so it makes sense to have interest only for the build period.

Interest only loans are a great tool, but like any tool they need to be used responsibly – the analogy I use is that interest only loans are like a knife; in the hands of a surgeon a knife can save a life, in the hands of a thug they can take a life.

If you need interest only borrowing, lenders can no longer assume a reason, they are now required to ask you to justify it and if it makes sense, it will in most cases be granted. There is a myriad of options when it comes to structuring a loan; when working with an experienced mortgage broker or banker they can help you establish the right mix of interest only and principal and interest to suit your circumstances.