6 common property investment mistakes and how to avoid them
25th February, 2021
Investment of any nature is never an exact science and the property market is no exception.
Interest rate changes, fluctuations in supply and demand, emotional decision-making, and broader economic shocks all conspire to make things a lot harder. However, there are still some tactics property investors can use when seeking the best possible value from their investment.
Below are some common mistakes you should try and avoid when considering your property investment.
1. Repaying debt indiscriminately
Trying to pay down all your different sources of debt simultaneously can be tempting. However, not all debt is created equal. Certain types of debt come with benefits others don’t have – such as tax deductibility.
One option is to use your spare cash to only pay down your non-tax deductible debt. This could include personal loans – such as those used to purchase a car or holiday – or debt used for your principal place of residence.
Once this non-tax deductible debt is eliminated entirely, you should move on to your tax-deductible debt – such as the loan on your investment property. That way, you’ll minimise debt that doesn’t give you any extra cash at tax time and maximise the debt which can.
2. Forgetting about depreciation
Continuing on the topic of tax – particularly as tax time will soon be upon us – many property investors often forget to capitalise on tax depreciation deductions, which could mean missing out on thousands of dollars of potential returns.
This issue could be remedied by seeking the assistance of a qualified Quantity Surveyor, who will prepare a depreciation schedule based on their assessment of your property.
3. Leaving rents to stagnate
What many investors often forget is that the rental market can move much faster than the property market as a whole, which is why rents are often left to stagnate unchanged for several years.
This means that, by the time investors realise they should probably increase payments, they may have to do so by $50 or $100 at a time – an amount that probably won’t be very well received by tenants.
A better approach may be incremental adjustments of $10 or $20 every time the lease is renewed. This is likely to be every six or 12 months, depending on the lease period, and should be far more palatable for those on the receiving end of the rise.
4. Holding out for an unreasonable rent
On the flip side, investors may inadvertently lose money by stubbornly clinging to their ideal rental asking price, despite little interest from potential tenants.
Often, such an inflexible approach will lead to extended vacancy periods.
If the desired rent is $500 per week, this means the investor is losing $500 every week the property remains empty. By dropping the rent by $20 or so per week, an investor could likely convince a potential renter to sign on the dotted line. Across a 12-month period, this would only lead to roughly $960 less income – or less than the equivalent of two weeks’ vacancy at $500 per week.
5. Assuming you know where the value is
Investment decisions should ideally be made based on the potential for wealth generation – something you can’t “just know”, but need to analyse the numbers to determine.
Including historical growth figures, local employment drivers, unemployment rates, vacancy rates, yield and population growth, to name a few, these metrics will provide a more informed indication of whether a property will perform or simply provide a trendy postcode.
6. Managing your own property
More and more investors seem to think they can do it all, including people attempting to take care of every aspect of managing an investment property.
In the process, they spend more time dealing with tenant complaints than working on the next phase of their investment strategy.
Hiring a Property Manager will not only allow you to focus on the value-added tasks of your investment business, it will make sure you keep up with any legislative changes, too.