Common investor mistakes when building a portfolio: How the experts buy with Miriam Sandkuhler
Buyer’s agent Miriam Sandkuhler, founder of Property Mavens, says many early-stage investors don’t understand their risk profile when they start building their folio. Sandkuhler was a finalist for the 2013 REIV Buyer’s Agent of the Year.
She says more risk adverse clients should avoid off-the-plan properties, as well as student or holiday accommodation.
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“People don’t understand their tolerance to risk in terms of the type of return they’re going to get,” Sandkuhler told Property Observer for the 'How the experts buy' series.
“A high risk profile person would be someone who’s prepared to develop a property or renovate. Someone who’s more conservative and low risk is someone who’s otherwise more likely to leave their money in the bank or pay for a property in cash because they don’t like debt.”
She says buying off the plans comes fraught with risk.
“They’re to do with whether the developer gets financing, whether they’re a good builder, time frames of the development,” she says.
“It depends on the zoning of the property, if you have student accommodation or short stay accommodation that can have a level of risk.
“It means that the market from a resale point of view is a lot smaller and from a lending or a finance point of view you may not be able to borrow as much money so you’ll have to have a much bigger deposit to get into it.”
She says many investors are enticed by the idea of having as big a property portfolio as possible.
“Having multiple properties you have to manage multiple properties and there are maintenance issues that come with that.”
“If all you need are six really really good properties of a certain value then that’s all you need.”
Transcript
My name is Miriam Sandkuhler. I’m the founder of Property Mavens which is a specialist property advisory firm. I’m an accredited property advisor and a licensed estate agent. And I basically work with investors to ensure they buy the right type of property for the right reasons.
People don’t necessarily know their tolerance to risk in relation to the type of return they’re going to get. Some people are much more conservative with investing than others. Some have got quite a low to moderate risk profile whereas other are higher risk profile. An example of a high risk profile individual is someone is prepared to develop a property or renovate.
Someone who’s more conservative or low risk is someone who might otherwise like to leave their money in the bank or they might like to pay for a property in cash because they don’t like debt or they might want to something very simple.
For example, if you don’t know your risk profile then it’s very easy to buy the wrong property for you profile for all the right reasons. If you don’t the type of risk attached to the type of property that you buy it’s also very easy to make a mistake.
If you buy off the plan there are a lot risks associated with that and they’re to do with very the developer gets the lending, whether or not it’s a good builder, time frames of the development. There a number of different areas. The market can go up and down. And we’ve seen a lot of that where people are settling on properties where it’s worth less than the contract price.
There are so many variables and so many risks associated with buying off the plan that most people aren’t informed off because obviously that’s not necessarily brought to light when people are purchasing in that manner.
Someone with a low risk profile probably doesn’t want to buy a development site. They may not want to buy an off-the-plan. When you understand your risk profile and you understand the risk of the property then you can make a better informed decision.
Alistair: What other properties do you think are higher risk profile?
So for example it depends on the zoning of the property. IF you have student accommodation, or short term or resort style accommodation that can have a level of risk because what it inherently means is from the market point of view the resale value is a lot smaller. It also means from a lending or finance point of view you may not be able to borrow as much money so you’ll have to have a much bigger deposit to get into it. The returns on that type of investment can be affected by the type of property it is.
Buying property is not simple. I know most people want an easy solution. It’s a little bit like going to the doctor for a headache and wanting a pill when in fact what they probably need is surgery.
So when you invest in property it’s easy to sign a contract but the process of understanding about what makes a good investment grade property and how to match that to your risk profile and having a plan in place all of those things are quite complex and they do take time and they take investigation.
I’ll often deal with clients who want to buy property but they have no clear reason as to what they want it to do. So they know it’s kind of the in thing and that’s what you do but they don’t know what the end result is. If you don’t have a plan it’s a little bit like trying to build a house without a set of plans. There’s no foundation from which to build the rest of the structure around. Having a documented plan is knowing how old am I now, when do I think I want to retire, how many years away is that. What sort of lifestyle do I want? If I want a $100,000 income it’s needing to calculate I have x number of years to accrue that. So what’s the process to get that and how many properties do I need to buy and how often do I need to buy them to meet my specific requirement. Part of that process is, I know everyone if out there spruiking buy 10 properties in 10 years. It’s not about how many properties you have. Obviously with having, multiple properties you have to manage multiple properties and there are maintenance issues that come with having multiple properties. So it’s about having a tailored plan specific to your individual needs. If all you need are six really really good properties of a certain value then that’s all you need. Unless you just endlessly want to keep going for the sake of it. Not everyone needs to have 10 or 20 or 200 properties, it’s not necessarily about that.
It’s understanding what is that asset going to do for you, what do you need it to do for you. And making sure that you’ve got a foundation or a documented strategy you can then implement and you can then measure back to that strategy. Every year you can see are you on target for that strategy, how far do we have to go so what do we need to do, when do we need to do it and monitoring that as you go.
It’s imperative to never ever sign your name to anything. Even if you have a three day cooling off, from a cautionary point of view you still want to get that looked at before you put pen to paper because there’s complexity around that. It’s law, you’re signing a legally binding contract and if you have haven’t had a lawyer or conveyance point out to you areas of risk or consideration then you’re leaving yourself vulnerable.
Again buying property is complex, you’re dealing with real estate law and legislation. If as a lay person you don’t have a really good understanding of real estate law then it’s possible to easily make mistakes that cost you money. You’re talking about needing to understand from an accounting and tax point of view before you start, how you need to structure a property; even before a name gets put on paper you need proper tax and accounting advice. Same with can you afford the property, you want to be seeing a mortgage broker who can look at your situation and work out what options are available to you and how many options there are in the market place that can help you.
The other thing is understanding that you need to be doing building and pest inspections s that before you buy the property at auction you understand the structural condition of it. There might be issues where’s the repairs or work that needs to be done so if you’ve got $20,000 worth of work on a property you need to factor that in when you’re buying or bidding on a property, you need to keep that in the back of your mind. Or at least allow for it.
If you buy a property and it’s not auction but private treaty, same thing, you want to be putting a condition in there that’s a building and pest inspection but it’s written in the favour of the buyer, not in the favour of the seller.
