The 7 Critical Mistakes
There are seven common property mistakes people make that impact their ability to improve their financial position and create the right foundation to ensure they achieve their lifestyle goals. Many of these seven mistakes interconnect. Under each mistake we have commented on how to overcome the mistake (which is closely linked to the seven criteria for success outlined at the conclusion of this Plan). It is vital that you are aware of and understand these seven mistakes so that you can avoid making them.
1. Starting without a property plan
The main reason you invest in property is to enhance your lifestyle via:
- Lifestyle property purchases – living in and enjoying your long-term home or holiday home, and/or;
- Investment property purchases – achieving a financial gain through rental income and capital growth.
And yet, it is alarming how many people jump into the property market without a considered strategic plan and end goal. If you don’t look before you jump, you significantly increase the risk of failure – either in the short or the long term.
Property success criteria – goal-setting and a long-term (property) plan
Take the time to consider your lifestyle and financial goals and develop a plan which will allow you to focus your time, effort and resources efficiently, effectively and with confidence for the short, mid and long-term view.
2. Starting without a mortgage strategy
In the chase for a great interest rate many buyers fail to take advantage of various strategic mortgage benefits available to them, dramatically increasing their costs in various areas through missed opportunity.
How your loans are set up and payments structured have a significant impact on the long-term costs and investment opportunities available to you. If done well, it can allow acquisition of assets without selling, buying you time to stabilise your financial situation. Moreover, a well-considered mortgage strategy can enhance the deductions on existing property when undertaking your next purchase.
If done well it should also provide the platform to structure your money management system which is vital to the success of every property plan. Moreover, your mortgage (and banking) strategy is the cornerstone to risk management.
Together, your Mortgage Strategy and your Property Plan are a powerful team.
Property success criteria – mortgage strategy and money management
A considered mortgage strategy that is regularly reviewed to match your evolving circumstances will give you confidence in your long-term property plan, cash flow management, mortgage structure and banking to provide the foundation to facilitate successful property decisions.
3. Get rich quick myth
The idea of supplementing your income with revenue generated by property investment is extremely appealing to many. Examples of short term property strategies include:
- Renovating and flipping.
- Building ‘granny flats.’
Short-term higher returns involve an increased level of risk, time commitment, equity or cash, experience and stress. Property is not a ‘get rich quick scheme’ (rather, if approached without planning, it can more commonly end up being a costly venture). For the vast majority, the smart approach is for property to be a ‘get rich slow scheme’.
Property success criteria – Time in the market and holding quality real estate
A low risk investment strategy involves purchasing high quality real estate, holding it for the long term and letting capital growth and increased rent work for you. You may choose to be an active investor – meaning purchasing quality real estate that needs a little love and attention which can add some value without needing to take a huge risk or be an expert in project management or construction. This approach can be undertaken within a low risk strategy.
4. Emotions negatively influencing decisions
Buying a home is an inherently emotional experience – the home is ideal, it’s exactly the location you want, there are five other parties keen on it… you need to be the purchaser!
Letting your emotions overly influence your decision when purchasing a home or investment increases your risk of making the wrong decision altogether and adversely impacting your lifestyle, or over committing financially. Rushing into a decision does not allow you time to research the market, determine the appropriate price, successfully negotiate, wait for the right home or investment, with the subsequent risk that you buy on a whim. Worse still is buying quickly because you do not want to commit the time to the process.
Conversely, delays associated with the fear of taking on debt, purchasing the wrong property, paying too much, and second-guessing the timing of the market can be very costly and cause paralysis by analysis. Your risk tolerance, family or work obligations, or lack of knowledge may cause you to rely on your emotions and lead to a decision that you may ultimately regret.
Property success criteria – risk management
It’s important to keep your emotions in check when purchasing a home. This is the time to be conscious of your finances, your lifestyle goals, and your overarching property plan. In advance of the purchase, consider how your emotions may influence you and plan for keeping them in check. With investment properties, think in terms of selecting the right investment ‘product’ – which allows for a more objective or emotionally detached decision.
5. The wrong location
If you let emotional decision-making take over, you increase the risk of purchasing the wrong property and/ or in the wrong location. Every property is unique and will provide different returns on capital growth and rental income – even if the properties are in the same street, pocket or suburb. Selecting the right property/ location will be influenced by issues such as:
- The attributes which are most often linked to outperformance.
- How to identify the micro determinants for a good property ‘product’ investment.
- Supply and demand.
Property success criteria – quality over quantity
Being educated on which property and locality attributes are linked to performance will maximise your returns and is critical to making superior property decisions.
6. The wrong asset
The most common cause of lower than expected investment returns is buyers having insufficient knowledge and information or the wrong information, prior to making an investment decision. This may be due to lack of time, effort or simply not knowing where to access the right information. Common questions that drive the asset selection strategy include:
- Should you focus on capital growth, rental return or both? What are the pros and cons of each?
- Location is crucial to superior property investment returns. But which location?
- When is the right time to buy?
- What else do you need to know?
Property success criteria – quality over quantity
Having the right information from a trusted source in advance of making property decisions increases the likelihood that you will make the right decisions at the right time.
7. Selling property too soon (or at all)
Selling a property always costs money. You may feel forced to sell your property too soon after it was purchased, before it has had time to grow sufficiently in value. The cost of doing this can be compounded further if you purchased the property at the top of a market cycle, and then sell during a downturn.
Unfortunately, a lot of wealth can be chewed up through selling and purchasing costs over a lifetime due to the lack of a Property Plan. This is grossly underrated in most property commentary and consumer awareness.
Failure to factor in your mid to long term goals at the time of purchase increases the risk that you may need to sell and purchase again in the short to mid-term. This is an especially expensive exercise when you add the cost of the lost opportunity, had you been able to hold the asset.
Property success criteria – holding quality real estate and mortgage strategy
A focused Mortgage Strategy will provide enhanced flexibility and opportunity should your plans or circumstances change down the track – allowing you to maximise your deductible interest and optimise your ability to hold property because your loans are well structured. Having your mortgage strategy in place is vital for success in combination with making each property decision cognisant of your long-term property goals.
Some, or all, of the Seven Critical Property Mistakes will have resonated with you. Your Property Plan is designed to help you avoid making them.
David is the Founder and Managing Director of Property Planning Australia, author of ‘How to Succeed with Property to Create your Ideal Lifestyle’, co-author of ‘Property for Life – Using Property to Plan Your Financial Future’, co-host of the ‘Property Planner, Buyer and Professor Podcast’ and a widely-published media commentator. With more than 20 years of experience, David is passionate about educating others to make informed, and ultimately, more lucrative property investment decisions. David established Property Planning Australia in 2004 – with the vision to educate and empower Australians to make successful property, mortgage strategy and money management decisions. Property Planning Australia’s operations have earned acclaim and national industry awards for its unique fusion of property planning, education, money management, mortgage strategy and risk management. All supported by multi award-winning customer service.