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At the risk of being ‘Dr Obvious’: it’s accurate to say no-one likes failure. No-one likes making mistakes, particularly costly ones. During coming months in InFront, I will reveal seven critical – and sadly, common – mistakes made by property investors and home-buyers.
By examining the errors of others, you can hopefully avoid the same property investment pitfalls. The highlighted mistakes (or lessons) are based on Property Planning Australia’s 16 years’ experience in analysing property market trends and the mindset and actions of investors – drawing on our conversations with literally thousands of keen property-hunters.
Before we spell out mistake number one, let’s take a step back in time.
Property and mortgage history ‘101’
Since the dawn of modern man, property has been the investment of choice and most obvious means of generating wealth. Nations, kingdoms and dynasties have been created off the back of land grabs or land accumulation. Land also allows us to meet our most basic need – shelter.
For the majority of Australians, property is their most significant financial investment, even outstripping superannuation. Residential property is the nation’s single largest and most valuable asset class, with a total estimated value of $6 trillion (as at July 2015). To put this figure into context, it is significantly larger than the value of listed equities ($1.5 trillion). Further, Australia’s gross domestic product (GDP) for 2014 amounted to $1.59 trillion, indicating the value of residential property is more than three times larger than the annual output of the nation’s economy (source: Core Logic RP Data’s Quarterly Review, September 2015).
That’s a lot of money in property, and potentially, a lot of opportunity, but like most major opportunities, it’s not without risks. With a lot of money in such a sizeable ocean, also come a lot of sharks. Compounding this issue is the fact that the property advisory industry is unregulated. The unfortunate reality is that most people are unsure about the specific elements that drive property values and overall returns. Perhaps more specifically, consumers are confused by the vast quantity of opinions across the property industry. Vested interest, largely driven by some form of connection with those selling property, is abundant and a major reason for the confusion.
The lending marketplace that drives our ability to be able to purchase property, and therefore drives the property market, is a largely volume-driven world. It is still seems odd to me that the mortgage industry that supports the decision-making around property purchases neglects to consider the property purchasing decision that drives the need to borrow money. This approach of mutual exclusivity – mortgage decision in this box, property decision in that box – is a major reason people have a disconnect when property planning.
As a result, when it comes to borrowing, most lenders, mortgage brokers and consumers get drawn like a moth to a flame in their focus on the interest rate above most everything else. This lack of any strategic approach to your financing structure, let alone ensuring it is congruent with the property decision as part of your long term planning, means costly mistakes are often made that cannot be reversed.
It is possible to achieve your family lifestyle goals through property if you get a number of key things right, stay disciplined and avoid costly mistakes along the way. Property investment requires patience. Unlike shares, you are not, or better said, should not be, watching prices go up and down daily. In fact, you only need to make property decisions every five-to-seven years to be successful, but you must be clear on your priorities. This requires developing a plan that considers your long-term goals (which we’ll talk about a little later) and making strategic decisions when executing that plan.
Do I have to purchase lots of investment properties to make it worthwhile?
While I mentioned earlier how property accumulation has historically created kingdoms and dynasties, you actually don’t need to own lots of properties to become wealthy and have flexibility in retirement. This is a message that we reiterate to our clients every day. With the right property education and strategic financing strategies, you only need to accumulate and hold three-to-five well-chosen properties (including the family home) throughout your lifetime to retire comfortably (and wealthier than the majority of Australian retirees).
We completely support owning more property if you are able; and you can achieve this by making each property purchase a positive decision.
There are plenty of property investment advisers/spruikers who are focused on convincing people to purchase lots of properties. This is largely driven by self-interest, rather than your best interest – every transaction you make, makes them money. As Property Planning Australia’s clients know, our property advice is independent and unbiased; we don’t receive any commissions from third parties involved in the sale of property. We are advocates of quality over quantity when it comes to property investment. This is one of our mantras. It also has the added benefit of keeping life simpler and we are big believers in the power of simplicity.
Avoiding the seven critical mistakes when investing in property
Property Planning Australia’s goal is to help you make property investment simple and enjoyable. We also want to share our expertise to guide better decision-making and, ultimately, financial prosperity and peace of mind. Let’s face it, outside of lifestyle property purchases, we realise that investing in property for wealth is driven by our personal goals to enrich our lives for our families and ourselves in retirement. It is all about supporting our lifestyle. We understand this!
In this edition of InFront, we’re launching the first of our series of seven articles focusing on the critical mistakes made by property investors.
Critical mistake #1: Starting without a plan
This is probably the single biggest mistake we see people make – launching themselves into purchasing property without an end goal or thorough analysis of their current and future financial situation.
We like to use an analogy with clients: If you’re heading on a journey, but don’t know the destination, how do you expect to get there?
You need a game plan.
The problem is many people look at the entire property-buying process as a transaction, rather than an investment strategy as part of an overall property plan.
Let’s remove the emotional aspects that can come into play when choosing real estate (which we will discuss in coming weeks) and remember that buying property is designed to achieve one thing – improving our lifestyle. Lifestyle improvement can be achieved via the following ways:
- lifestyle property purchases (i.e. our home or holiday house) – meeting our requirements for the place(s) that we reside and spend time with loved one, or
- investment property purchases – where we achieve a financial gain through rental income and ideally the growth in value of the property. As the rental income and property value increase over time, it provides a boost to our income as well as extra equity we can leverage against to further invest. We can also realise the equity via the sale of the asset.
In short, lifestyle properties to meet our day-to-day living ‘lifestyle goals’; and investment properties to meet our ‘lifestyle goals’ through income via rental cash flow or cash following a sale, hopefully no sooner than retirement.
The first step of your property-purchasing journey should be developing a property plan. Often people tend to jump straight to the property selection component without considering things such as:
- your short- and long-term goals (not just financial)
- whether you want high yield via rental returns or are you looking to achieve long-term capital growth? (This will help to inform the type of property that is best suited to your goals)
- how you’ll manage your cash flow today and into the future
- strategic financing solutions to provide flexibility for the future, maximise tax deductions and help you to manage risk
- how your home-buyer strategy might impact your investment strategy and vice versa
- the ‘why?’ – the reasons behind your goals i.e. the benefits for you and your family
- current stage of life and future major life changes, e.g. starting a family, empty nesting
- your risk tolerance
- saving capacity/debt reduction goals
- income expectations into the future.
The list could go on…ultimately the planning should make the property purchasing strategy clear.
Because everyone has differing financial circumstances, commitments and goals, there’s no ‘one size fits all’ golden plan for property investment. You can contact Property Planning Australia’s staff to discuss your specific needs and how we can work together to develop a tailored property plan for you.
David Johnston, Managing Director
Click here to make a time to discuss your personalised property planning needs or call the office – 03 9819 4088 (Melbourne), 02 9387 1344 (Sydney) or 08 8373 6271 (Adelaide).