In property investment, there isn’t a mistake that hasn’t already been made. Most are made by beginner investors, who haven’t yet gained the experience to avoid them. It’s these mistakes that stop investors from continuing after their first investment and becoming property millionaires.
Be specific before you start investing. Know why you are investing, and the timescale of investment. Do you want to benefit from income now or in the future? Are you trying to build a property portfolio that will support you through your retired years? Do you plan to sell properties before you retire, perhaps to make a capital gain to meet other financial obligations?
Answering questions like these are integral to creating a property investment plan to get you to where you want to be in life.
When you buy a home, your emotions kick in. You just know when it’s the right property for you to live in. Investing in property is a whole different animal. If you let your emotions overrule property investment logic, you are almost certain to lose money.
Don’t consider a property with an emotional bias; think about it as if it were a box printing money. Consider your investment objectives, and ask if this property will help or hinder the achievement of your goals. Will it appeal to tenants, and will those tenants pay the required rent to make the investment viable? Will the property fundamentals support the investment in the long term?
Research the location, find out how much rental income is likely, work out your cash flow, and only if all of this stacks up should you invest.
I sometimes call this foolishness vs fear. The foolish property investor acts in haste. They don’t sleep on a deal. They believe everything the seller’s agent tells them, and then rush to sign on the dotted line. Their gung-ho attitude will probably cost them money, although a rushed investment can sometimes come good.
On the other hand, there are investors who over deliberate. They have this huge internal fight racing around their head and hesitate before doing the deal and they hesitate some more and then some more. Before they know it, someone else has stepped in and stolen what would have been a great property investment. These types of investors will never overcome their fear. They’ll spend hours, days, months and years learning the game, but never play it.
You need to be in between these two opposites. Get enough investment education to get started. Team up with a great property mentor who will hold your hand, and walk into the water rather than dive in head first with your eyes closed.
I’ve seen first-time investors attend property auctions and buy a property at a ‘bargain price’. Months later that same property has come back to the auction. It has failed to give the investor return, and they are now desperate to sell and cut their losses. They worked out their numbers on the back of an envelope and didn’t do their due diligence before buying.
When you don’t do your due diligence properly, you are likely to pay the wrong price or, worse still, buy the wrong property. For example, a property designed for young professionals in an area that attracts mostly young families.
Before investing, you must know where to invest and what type of property to buy. Then you must work out the cash flow, and be confident that the property will produce what you expect it to. You’ll need to speak to local letting agents, be sure of the area in which you’re buying (do all the property fundamentals – shops, schools, transport links, major employers and major investment – stack up?), and work out a two-year cash flow. Don’t forget to factor in void periods, and allow for an increase in mortgage rates to be on the safe side of your finances.
One of the incredible benefits of property investment is that you get to invest with borrowed money. Using a mortgage to fund your property investment allows you to profit from other people’s money. It could massively boost your returns and yield on your capital investment (the deposit). Get the financing wrong, though, and your profit could disappear.
When you invest in property using a mortgage, the interest payments are likely to be your biggest monthly outlay. But getting the best financing isn’t simply about getting the lowest interest rate. There are many other considerations to make. For example, if you are likely to want to sell or restructure your mortgage in the next couple of years, the savings from a lower interest rate could quickly unravel with early repayment charges.
My advice is always to use an experienced buy-to-let mortgage broker. They will know the market like the back of their hand and help you avoid costly financing pitfalls.
You may need help with managing your property investment finances. You will have income (from rent) and expenses (mortgage, maintenance, repairs, investment property management charges, etc.) to receive and pay. You may be liable to pay tax. Get in a mess with your property investment finances, and you could find yourself needing to subsidise the mortgage from your resources.
Always project your cash flow, and set aside an emergency or reserve fund. This way you will be prepared if your investment does suffer a short-term shortfall in rental income.
Also, use a good accountant to help you with the tax side of things. Make sure they are experienced with accounts for property investors, so they know how to minimise any tax liabilities.
Only after investing does the hard work begin! You’ve got to find and vet tenants, make sure they pay their rent on time and keep up with maintenance issues. You’ll need to organise tradespeople to attend to repair work and keep all your paperwork in order. You’ll also have to make regular property inspections and maintain an updated inventory list.
Managing an investment property can be hard work. Managing a portfolio is a full-time job. You may think you’ll save money by managing your investment properties yourself. With one property, providing it’s local to you (rarely the best place to invest), you may save a few quid. But what happens when your property portfolio grows and is geographically dispersed?
My advice is to hire a great investment property manager from day one. Let them have the day-to-day hassle, while you concentrate on enjoying the benefits of investing in property.
Start investing as you mean to go on
We all learn from mistakes, but it’s much less costly to learn from other people’s mistakes than repeat them. By avoiding these seven most common mistakes made in property investment, and ensuring you continue to invest without making them, you should achieve your investment and lifestyle goals earlier.
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