10 things to watch out for when purchasing an investment...

10 things to watch out for when purchasing an investment property

PHONE EMAIL WEBSITE

02 8238 0822 [email protected] binnari.com.au

10 things to watch out for when purchasing an investment propertyInvesting in property can be a great way for Australians to build wealth. However, choosing the right investment property can be a complicated process… and a mistake can cost you thousands.

To help you make the right buying decision, we’ve compiled the most common mistakes we’ve seen inexperienced investors make. Make sure you avoid them with your next property purchase to ensure that your investment pays off.


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Being influenced by high pressure seminars and sales people

Failing to get a mortgage approval

High pressure wealth seminars make money by applying hard-and-fast sales tactics to bring investors on board. People can get persuaded into investing their hard earned cash into the ‘next big thing’ with promises of financial freedom—only to be sucked into a financial sinkhole.

During the mining boom many investors jumped at the opportunity to purchase properties that promised enormous returns. But when the mining activity declined or in some areas stopped completely, these investors were left with properties that they couldn’t rent or sell.

Secure your success: Be wary of high-pressure, wealth-building seminars and sales agents that require you to sign a contract immediately. Do your research before making any decisions. If it sounds too good to be true, it probably is.

Secure your success: Prior to making any decisions or signing contracts, see a mortgage broker or bank for a finance assessment.

Understanding how mortgages work is crucial to your success as an investor. Many people enter into property contracts without understanding the process, or even knowing if they would qualify for a loan. This puts you at risk of being unable to settle on the property. If this happens, you may lose your entire deposit plus purchase costs, which could set you back years in your investment plan.

In several instances, investors have blindly bought properties in locations that banks deemed ‘high risk’. Not knowing all the details before they signed their contracts, these investors never expected that the banks would require a higher-than-usual deposit, or completely refuse their loan application altogether.

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Lack of research into what you’re buyingProperty costs in cities like Sydney have been on a sharp rise, driving more investors to expand their search to areas outside of where they live. This can be a great strategy to get a foothold onto the investment ladder with lower upfront costs, whilst also capitalising on tax advantages and diversifying your property portfolio. But it can also be a costly mistake if you don’t do your research.

Many investors are attracted to Melbourne, with Australia’s fastest growing population. While investing in one of the world’s most liveable cities can provide many benefits, it’s still imperative to purchase the right property. There have been many cases of investors purchasing sub-sized apartments in parts of central Melbourne, only to later find that their investment is inadequately small and one of thousands sold to other interstate and overseas investors. As a result, many have suffered poor rental returns and below average sales growth.

Secure your success: Avoid making decisions based on stunning photography or fancy marketing collateral. Schedule a visit to the property or work with a property investment professional. The right partner will do the ground work for you, and give you the peace of mind that your purchase ticks all the right boxes.

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10 things to beware of when purchasing an investment property

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Buying in areas over-suppliedwith investorsProperty markets are driven by supply and demand. Excess supply typically drives down rental income and sales demand. If you purchase a property in an area dominated by investors, the competition will be high and may force you to drop your rent to compete for tenants. It will also drive down property values, leaving you with little or no profit at sale time.

Many investors who have recently purchased apartments in particular areas of Brisbane and Melbourne found out too late that other purchasers in these areas were predominately investors. They were forced to drive down their rental expectations in order to secure tenants and try to generate cash flow.

Secure your success: Dig into urban planning policies to see what is going on beneath the surface. Uncover the intended supply of the area you’re looking at, and weed out areas where investors are rapidly buying. Instead, focus on areas that have a strong demand from local owner-occupiers.

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Sacrificing on qualityPurchasing a property to rent or resell is no reason to skimp on quality. Keeping cost at the forefront with a lack of consideration for practicality and desirability is a fast road to investment failure.

For example, many investors who don’t intend to occupy a property often make the mistake of buying units and townhouses that are impractically small for most tenants. As a result, it’s more difficult to find tenants. You’re also likely to have a higher tenant turnover, leading to increased costs and longer vacancy periods.

Secure your success: Commit to only purchasing decent-sized properties in desirable locations, with functional layouts, natural light and plenty of storage.

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Not buying the right property for the local marketEvery community has a specific demographic and an ideal property type that will appeal to the majority of local residents. When reviewing properties it’s crucial to know the local tenant profile and what’s important to them to ensure that your investment will be easily tenanted.

For example, buying a one bedroom apartment in an area where the local tenant profile is driven by families attracted to a nearby school could become a financial burden. A house or townhouse would be a much more suitable and desirable option to meet a family’s needs.

Secure your success: Do your research to gain a solid understanding of the local tenant profile and ensure that the property you purchase meets their needs.

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Failing to understand the property’songoing costsCosts don’t end after the initial property purchase. Don’t get so caught up with elaborate property features and unique amenities that might make the property unsustainable in the long-term.

Investors may be attracted to apartments with amenities such as large pools and gyms, only to be hit by high running costs after the purchase. The high strata or body corporate fees can significantly drive up the cost of what first appeared to be an affordable investment.

Secure your success: Educate yourself about ongoing costs that may come with purchasing a property, such as strata and body corporate fees, insurance costs and future repairs. Knowing your expected costs before you jump in will help to ensure that your purchase is a sustainable long term investment.

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Banking on a quick winEntering into property contracts with the expectation of immediate returns can quickly lead to disappointment, disillusionment and financial loss. Every property comes with upfront and exit costs, including stamp duty, legal fees, agent’s fees and potentially capital gains tax that will impact your profit.

An investor purchasing a $500,000 property is required to pay approximately $20,000 in stamp duty and legal fees. If the property sells in 24 months for $550,000, what first seemed like a sizable profit of $50,000 could quickly disappear with agent’s fees, solicitor’s fees and taxes.

Secure your success: Clearly define your property investment strategy. Because property is a long-term investment, it’s crucial to have a strategy that will allow you to hold the investment long enough to benefit from the expected increases in income and capital growth.

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Buying based on emotionKeep in mind that you’re buying an investment, not a place to live. Rather than buying properties based on your own tastes, know the needs of your local market and make your investment decisions accordingly.

For example, an investor may discover a hidden gem while on holiday and be convinced that others will fall as madly in love with it as they have. But buying blindly without understanding the seasonal nature of the area may negatively impact their rental income and sales growth.

Secure your success: Stay focused on the key investment factors that you know will generate sustainable income and long-term capital growth, such as a diverse economy and a strong job market.

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10 things to beware of when purchasing an investment property

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Skimping on professional adviceInvesting in property is often one of the largest financial decisions you’ll make. To avoid some of the pitfalls above, it’s worth getting professional advice.

If you’re spending $500,000 plus, the difference between a good and poor investment could be worth hundreds of thousands of dollars.

Property investment can be a great route to financial freedom for those who build the right foundation. However many investors lack the time and expertise to identify the opportunities that will provide stable income and long term capital growth. Sound research and professional advice are imperative to ensure that you have the right strategy for success.

To learn more about how we can support you on your property investment journey, contact us for a complimentary, no obligation consultation.

Secure your success: Speak to a property investment professional. Spending a fraction of a property’s value for professional advice will pay dividends long into the future.

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Need help finding the right property? Click here to book a complimentary meeting, or contact us on 02 8238 0822 or [email protected].

The information contained in this paper is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice.

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