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Common Property Investment Mistakes

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    Common Australian Property Investment Mistakes Buyers Make

    Experts believe that the key to buying an investment property is to be well-informed. However, it is equally necessary to conduct your own research.

    If you had to choose between investing in stocks and investing in real estate, which would you choose?

    The vast majority of people would answer "property." This is because property is something that we have all experienced in our lives, so we naturally feel we understand it better than shares or managed funds.

    Investing in real estate appears to be all the rage these days, which is not surprising given the numerous perks that come with it, such as capital returns and rental yields.

    But, like everything else in life, investing in property has its drawbacks, and if you're not careful, you could be led down the garden path.

    So, before you begin investing in real estate, keep the following typical blunders in mind:

    Would you like to speak to a specialist? Book a complimentary discovery session by calling: (03)999 81940 or emailing team@klearpicture.com.au.

    Inadequate research and due diligence

    Although it may appear simple, understanding where and what you are purchasing will assist determine your long-term profits. Conduct some research to learn about the suburb you want to buy in, including rental demand and the local population and the demands of your prospective tenant. Young working professionals, for example, will choose a different type of rental property than a growing family. Knowing your investment strategy and then engaging with local professionals (such as mortgage brokers, real estate agents, and financial planners) can help you determine whether a certain suburb or property is suited for you.

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    Choosing the incorrect location

    We've all heard the expression "location, location, location," so it's no wonder that choosing the wrong place is at the top of our list of mistakes. When looking for an investment property, avoid sites on key highways that lack infrastructures such as transportation, shops, and parks.

    What's the reason? This type of home, without amenities, will not be an appealing rental to tenants. That's why it's always a good idea to make a list of features your ideal investment property should have to ensure you're not just buying in the appropriate suburb but also in the perfect position within that suburb.

    Buying with a Short-Term View

    Purchasing an investment property entails some significant upfront expenditures, which are typically around 5% of the purchase price. When you factor in the continuous interest on the loan, you can see how important high returns are; otherwise, you will lose money, especially in the short run. Time is required for the power of compounding value to reveal an investment property's true value as an investment asset. If your circumstances are likely to change in the near future and you will need to sell your property in 5 years or less, it may not be a sensible investment for you right now. In our industry, short-term investing is defined as 10 years or more, middle-term investing is 25 years or more, and long-term investing is defined as never selling so you can reap the full benefits of an income for life!

    A long-term mentality is essential, as evidenced by a couple buying with two incomes but failing to plan for lowering to a single income when they had a family.

    Understand why you are purchasing a home. Are you looking for short-term or long-term profits? Do you intend to reside in the house or is it purely for investment purposes? What kind of property can assist you to accomplish your revenue objectives? All of these questions may need to be addressed before you sign on the dotted line; you don't want to be forced to sell a house within the next five to seven years.

    While mortgage interest rates are currently at all-time lows, you never know when the market will change. By using our rate change calculator, you can ensure that you can afford your ongoing repayments if your lender raises your interest rate in the future.

    Pursuing the Lowest Interest Rate Alternative

    Many people believe that the lowest interest rate on a home loan is the best deal for them. But it's not always that simple.

    Getting a loan with a low-interest rate does not guarantee that you will get the cheapest loan available, especially if you do not thoroughly review the loan's tiny print.

    Extra payments towards your loan may be limited by some institutions. Others impose a minimum loan amount in order for you to qualify for the best discounts. If you want to get out of a fixed rate before the term finishes, you may have to pay break fees, or you may be unable to withdraw extra payments.

    In any event, the interest on your loan is a deductible expense for an investment property.

    Making decisions based on emotions

    It's a typical mistake to try to buy a house because of the lifestyle perks it provides rather than the foundations it offers.

    When purchasing real estate, about ninety percent of your decision will be influenced by emotion, while just ten percent will be influenced by logic. This makes perfect sense when you consider that your house is going to be the place where you bring up your children.

    It is a safe sanctuary for you.

    When it comes to making investments, though, one of the most common mistakes that may be made is to let one's emotions influence their purchasing decisions. This is a mistake that must be avoided at all costs.

    If you let your emotions get the best of you and cloud your judgement, you increase the likelihood that you will over-capitalize on your purchase rather than negotiate the best possible price and outcome for your investing goals.

    It is ineffective to use it both as a holiday house and a property for investment purposes. It was common for vacation homes to have a low income, weak capital growth, and a high level of maintenance needs.

    "What a stunning backsplash, and that garden patio looks like something out of a dream!" But hold on...before you fall in love with a house that you think is "so me," take your emotions out of the equation and ask yourself if it's really worth paying a premium for those qualities if you won't be living there and if it will truly boost the potential for higher rental returns. Before you fall in love with a house that you think is "so me," take your emotions out of the equation and ask yourself if it's really worth paying a premium for those qualities.

    It's possible that you'd be better off purchasing a run-down house that you can fix up on your own and selling it for a profit.

    Property loving is not always a bad thing, especially when considering the fact that broad owner-occupier appeal makes a property easier to sell. It is excellent if it has a lot of character and is located in a desirable location, but it needs to be within your budget in order for you to purchase it.

    Beginning property investors should always buy the property after conducting extensive studies.

    Will it result in the revenues and returns that were anticipated? Is it situated in the most advantageous area conceivable to entice the most desirable tenants? Will the market for homes occupied by their owners, which is responsible for the long-term stability of property prices, find it appealing?

    By providing responses to these questions, you are more likely to be considering financial gain than your own personal feelings. This is analogous to purchasing a home because you liked the drapes or felt it would make a wonderful holiday hideaway.

    In the end, investing is not about how you feel but rather about the economics involved.

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    Failure to buy inside your budget

    Buying, managing, and selling an investment property may be expensive, so think about what you can afford in terms of repayments, continuing, and hidden expenditures. If you can't finance the property while still living your life, you'll be in big difficulty.

    Stamp duty, conveyancing fees, legal fees, search fees, and pest and building reports are some of the expenditures associated with property investment. When you buy a home, you must also consider ongoing expenditures such as property management and mortgage payments.

    Overborrowing and buffers for safety

    It is fairly uncommon for investors to get overconfident after purchasing many properties.

    What ends up happening is that individuals have a tremendous feeling of surety as well as a superficial confidence in themselves, and as a result, they go out and buy all of these houses.

    However, if you have borrowed up to your limit, refinancing may become difficult for you. This is especially true given the tightening of regulations governing lending. When you borrow 95% of the property's value, you have no wiggle room in the event that interest rates go up while rental prices stay the same.

    Cross-collateralization is the practise of using two or more properties that have been financed by one bank as collateral for further properties that will be financed by the same bank.

    It is a serious mistake to have your own house loan and the loans on all of your other properties with the same bank. If you do this while you are establishing your portfolio, the bank can end up holding all the cards, which could put your home at risk.

    By using the equity in your home to pay for the down payment and other fees associated with purchasing another property, you can avoid cross-collateralization and protect the value of your primary residence at the same time.

    Not Recognizing That You Have Lazy Equity

    When consumers are seeking to grow the number of investment properties in their portfolio, one of the most common mistakes that they make is sitting on "lazy equity." The problem emerges because the majority of individuals do not have a clear understanding of what lazy equity is and how it may be avoided.

    Lazy Equity refers to the equity that you have amassed in your property portfolio but is not putting to the best use for whatever reason (i.e. to invest in more appreciating assets). The following are the two primary reasons why investors accumulate indolent equity:

    • being unaware of the present value of your property; and
    • Not having the most appropriate financing arrangement.

    Intelligent investors should monitor the rate at which the median house value in the suburbs in which they hold investment property is increasing or decreasing. Even if the median house value is not necessarily an indication of the value of their property, it can serve as a "marker" to encourage you to carry out further in-depth investigation of the property prices in the surrounding area.

    The term "lazy equity" refers to equity that is available for use but is not put towards funding additional investments. If you do not keep track of your stock position, you run the risk of incurring financial losses.

    Make sure you have a good understanding of the pricing of your properties, and if you notice that sales in the area are trending in a positive direction, request that the bank revalue the property.

    Absence of a Finance Clause in a Contract

    Under no circumstances should you ever sign a contract that lacks a "subject to funding" condition. If you are unable to obtain the appropriate funding to purchase the home, you may be able to void the contract by including a financial provision in the agreement.

    Before committing to the deal, you will have the opportunity to think about the acquisition and perform any necessary research on it.

    Other common errors made in real estate investments include the following:

    • It is not a smart strategy to invest in real estate if you are willing to pay more than everyone else does at auctions.
    • Overcapitalization - it is critical to stick to your budget.
    • It is best to try to sell the property for a profit rather than try to refinance it in order to buy another home.
    • When paying off debt, it is preferable to set up a redraw facility.
    • A failure to have specialists analyse your contract; it is doubtful that you will know everything to protect yourself from potential risks.
    • Investing in property in a regional or rural area where there is a greater supply of land results in lower prices since there is a surplus of supply.
    • Are you anticipating a market decline? The odds are that the market will increase, not decrease.

    Inadequate strategic planning - When new property investors fail to plan, they intend to fail.

    It's an antique saying, but it's really true.

    Planning is essential; many people acquire properties because they believe they are a safe, stable asset class, but they fail to consider their current stage of life.

    Will you be short of funds for your super fund if you need to reduce your tax? It's a silly thing to do if you don't fit the homes to your lifestyle and circumstances.

    When it came to retirement, it was critical to examine departure plans. In order to get a continuous income from an investment property in retirement, the property must be paid off in full.

    In contrast, a first-time buyer trying to get their foot in the door and chase capital growth can negatively gear an investment property, pay down debt, and then use the home as a primary residence later on.

    What kind of property do you need to buy to reach your income targets?

    You will wind up exactly where you want to be with a thoroughly thought-out blueprint of your investing path, so plan your action and then execute your plan.

    If you're a newbie seeking for a tried and true property investment plan, an established investor who is stuck, or simply want an objective second opinion on your position, let the independent property strategists create a tailored Strategic Property Plan for you.

    You're more likely to attain financial freedom if you have a Strategic Property Plan since we'll help you:

    Define your financial goals and check to determine if they are achievable, especially given your time frame.

    Track your progress toward your objectives to see if your property portfolio is working for you or if you are working for it.

    Find techniques to maximize your wealth generation through real estate and identify hazards you hadn't considered.

    And the true benefit is that you'll be able to develop your money faster and more safely through your property portfolio than the ordinary investor.

    Depending on rental income

    Many investors buy with the expectation that their rental income will pay the majority of the investment property's expenses, but what if you can't find a tenant for an extended period of time and your revenue is insufficient to meet the costs?

    It's dangerous, and if you can't keep up with the payments, you may fail on your loan and the bank may seize your investment property. As a result, only borrow what you can afford to repay. To obtain an idea of the amount that will work best for your financial position, use our home loan repayments calculator.

    When it comes to rental income, keep an eye on the market and make rental increases whenever your tenant's lease expires (usually 6 or 12 months). Rent hikes of $10 or $15 are more likely to be accepted by your renter than rent increases of $50 since you've been apathetic and let too much time to pass.

    Would you like to speak to a specialist? Book a complimentary discovery session by calling: (03)999 81940 or emailing team@klearpicture.com.au.

    Not knowing what you can claim

    One of the best aspects of purchasing an investment property is negative gearing, which means that if your rent does not cover your home loan repayments, you can deduct a portion of that expense. However, interest on your loan isn't the only thing you might deduct on your taxes.

    So consult with your accountant to ensure you're getting the most out of your tax return by taking advantage of all possible deductions. These include the costs of any repairs to your investment, as well as council rates and strata fees (among other things).

    Getting professional assistance on lawfully lowering your tax is a wise decision. You should constantly strive to safeguard what is properly yours. However, don't rely your property purchase decision on a lower tax bill. Tax benefits are a significant selling feature for any agency selling new stock (sometimes because they don't have much else), and they structure their selling angle around the premise that once the tax benefit is included in, the property will only cost you 'less than $50 per week to keep,' for example. You should be concerned with how much it will cost you to hold rather than how much it will increase in value. If it does not appreciate in value as well as, say, another property with fewer tax benefits, you will lose significantly more money than the tax benefit will provide.

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