A couple of classic first time investor mistakes

Hi Margaret,

We are looking to buy an investment property in the next couple of months, preferably a house on the Gold Coast, because we've lived there before and it's affordable.

We have a house in Penrith, but Sydney is too expensive for what we're after at present.

Do you think the Gold Coast would be a wise move?

Kind regards and many thanks,

Stacey

Hi Stacey,

You sound like you are about to make some of the classic first time investor mistakes, so well done for writing to me first so that we can make sure that you don't!

You have said "preferably a house on the Gold Coast" and then quoted two reasons - that you lived there before and that it's affordable.

Living in an area doesn't turn it into a viable place to invest!  In addition, while investors always state that they have lived in an area, and so 'know it well'  as a reason for choosing it, it's highly unlikely that you 'know' the investment fundamentals about that area.

For example, can you quote the current vacancy rate?  Population growth statistics?  Median household income?  Council plans for infrastructure? Employment stats and industry spread?  I'd say no, and unless you start at least with those basic questions then you might as well throw a dart at a map of Australia and invest where it lands. You have the same chances of success using that method as you do using the 'we know it' method.

Investors must take care not to fall into the trap of believing that living in an area gives them special knowledge, and also that unless you live somewhere you cannot know it well.  There's absolutely no added safety investing in a market you've previously lived in.

In fact, there is often added danger as your familiarity makes you careless and you fail to adequately perform the due diligence needed to make sure that, at that moment in time, you are choosing the very best area to invest in.  Contrary to the rubbish that property spruikers spout, property investment can, and does, fail dismally and until you have learned how to recognise a viable investing area, you shouldn't be buying at all.

The second mistake you are about to make is that your decision making process is being 'price driven'.  This is common and is a situation where an investor uses a price range or price point to determine where they buy.  The reality is that it is never price which determines how well an area will grow. If you are driven by price you may well end up in an area where the returns you see mean that keeping your money in the bank would have been a more profitable venture.

Instead, you should learn how to select an area by doing the research first, and then, if properties in your price range are not available in that area, go looking again for another area which also shows the growth drivers.  I can assure you this 'Sydney' obsession will soon end and those buying there may land quite disappointed with the overall results.  There are many, many areas today with significant growth drivers, showing great promise and with affordable property - you just have to learn how to find it!

Regards,

Margaret

She is the founder of Destiny.

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