Simon Buckingham's top 10 investor pitfalls
After earlier this week sharing his top 10 things which he looks for in an investment property, director and RESULTS coach of RESULTS Mentoring, Simon Buckingham, followed up with his 10 investor pitfalls.
1. Believing the myth that property always goes up in value.
Many property spruikers still promote the idea that that property doubles in value every seven-10 years. But any historical study of actual median price movements demonstrates that this isn’t the case. Prices tend to go up in short bursts, and only about 30% of the time.
In fact there can be long periods when property prices in any given suburb are flat or even fall. Research into local market dynamics is essential to avoid picking an area where prices are more likely to trend sideways or fall in the near term, and to have the best likelihood to buying in areas that are going to increase in value.
2. Believing what you’re told by someone with a vested interest in selling you a property.
If someone is recommending that you buy a particular property, ask yourself: What’s in it for them? Do they really have your best interest at heart, or are the more focussed on the money they’ll make if you buy one of their properties? Remember, a real estate agent, developer or buyer’s agent will make money whether or not the property you buy through them actually meets your personal financial needs.3. Buying on emotion, instead of research and due diligence.
This is especially a danger at auctions, because the entire auction process is designed to play on the emotions of the buyer by creating a competition where the highest bidder is the “winner” (Congratulations! You’ve just paid too much for your property!)Always carry out due diligence before committing to any property purchase. This means examining recent comparable sales, crunching the numbers to understand the potential for profit in the deal, working out your maximum purchase price, and checking out the risks.
4. Buying a property because “it’s a bargain!”
A property that appears cheap, may be cheap for a good reason. There could be expensive structural issues, high-tension power lines overhead, an old mine under the backyard, or the “neighbours from hell” next door. Always carry out due diligence to check whether a “bargain” property really is the deal of a lifetime, or is actually a disaster waiting to happen.
5. Investing in property primarily to “save tax”
It’s not really hard to save tax… all you need to do is make a loss, and then claim that loss as a tax deduction! If your main reason for buying a property is to get a tax saving (for example, through negative gearing), then you’ve missed the whole point of investing… which is surely to make money rather than lose it! A tax saving doesn’t turn a bad deal into a good investment. Treat any tax savings as a bonus – not the sole reason to buy a property.6. Failing to properly research the area in which you plan to purchase.
Invest in the wrong area and you may find that you’ve just bought into a suburb that is going to go nowhere, or worse, decline in value. Why would you want to buy and hold a property in a suburb where values were going backwards?
Find out about local population trends, housing supply and vacancy rates. A falling population will undermine property values as people (and money) leave the area, and vacancy rates increase. Prices tend to rise slower in areas where plenty of new houses or units are being built, especially if the supply of new housing outstrips the rate at which the population is increasing. This is a common issue with large new housing estates and areas with many high-density apartments.
7. Entering into an unconditional contract to buy a property, without first obtaining finance approval.
If your contract to purchase a piece of real estate is ‘unconditional’ and you can’t complete settlement because you’re unable to get a loan, then you’ll probably lose your deposit (and possibly more).
8. Omitting to undertake a building and pest inspection on a property before buying.
Unless you are a builder, you could easily miss costly problems with the physical dwelling, like a leaky roof, damaged foundations, a termite infestation or worse! What sounded like a “bargain” at the time could rapidly become a far more expensive money-pit because you didn’t get it properly checked out by professional building and pest inspectors.
9. Buying a property after a 15 minute inspection, or worse, site-unseen.
It’s scary to think that most investors spend more time deliberating over a new pair of shoes for $100 than they do on evaluating an investment property for $500,000! If you’re going to invest hundreds of thousands of dollars in a property, do more than just looking at photos on the internet or attending a 15 minute open-for-inspection.
Invest a little time and money to properly check out both the property and the neighbourhood. Otherwise you might find you’ve just bought the best property on the worst street, right next door to the local “crack house”! And remember, photos often lie.
10. Listening to the opinions of people with little or no actual property investing experience.
Only ever take property investing advice from those who can demonstrate they have experience in the kind of property investing strategies you’re interested in, and who have a track record of success. Do not listen to the opinions of those who have never invested in property before, or are not investing in the current market.
Simon Buckingham is director and RESULTS coach of RESULTS Mentoring as well as the author of The Real Deal: Property Invest Your Way To Financial Freedom.