These Are The 4 Biggest Pitfalls In Property Investment. You’ve Probably Already Committed At Least 1 Of These
There are many profit variables that make real estate attractive, but at the same time these variables can cost big dollars if not handled correctly.
But with the positives often lie negatives. And, like all forms of investment, property also has its downfalls. Investing in real estate is not for the faint-hearted. There are many profit variables that make real estate attractive, but these same variables can cost investors big dollars if not handled correctly. We take you through some of the common roadblocks property investors face and how you can get around these.
Overcapitalising on your investment is not a recipe for success. Having gold taps in every room with chandeliers and solid marble benchtops in a low socio economic area, is not going to increase your rental return to cover the costly expenses. It’s important to think carefully about the demographic you are serving and think about their needs. Will your tenants mind if the kitchen benches are stone or laminate? The answer is likely no, so remember this when getting out the credit card to pay for the property upkeep. Provide necessities, such as carports and quality appliances for the most competitive prices possible. This will keep the money in your own wallet while also ensuring the property maintenance is kept at a reasonable level.
Kyall Walker and his partner, Cassie, purchased a property in Kew, Victoria a few years ago. The couple paid $495,000 for the two- bedroom apartment in 2008. $30,000 worth of renovations were completed with help from Cassie’s father and his building business. They were able to do everything at cost price. While many investors may not have personal ties to trades people, there are always ways to save renovations – DIY, using sample materials and appliances, etc.
When the couple later sold the property in 2010, the value had increased to $582,000 Kyall and Cassie made $57,000.
Secondly, once you have a property ready for rental, make sure it is well-managed. Taking it to a huge agency such as LJ Hooker or the Professionals is not a wise move as often they have huge rent rolls with hundreds of properties and won’t give your investment the time it deserves. Make sure inspections are done three times every year and that you receive a comprehensive Inspection Report, including supporting photographs and any recommendations for property maintenance or damage.
Kath Carlson found out the hard way how poorly some property managers conduct their services. She chose to partner with a well known real estate and property management company that had a large number of rental properties on their books. She thought thiswas a good indication of the service level and success. Unfortunately though, the two property managers assigned to the properties were not able to keep up with demand. Kath was forced to take time out of her busy life to part-manage the property, while still paying the agents to supposedly do their job.
Making emotional decisions on purchasing an investment. This includes making the house so beautiful that you would live there, buying in your favourite location – you get the idea. This is a commercial exercise that needs to be financially viable, not emotionally.
Buy in the areas where rental demand is high, in high growth areas, with solid infrastructure. Also make sure the property is livable and clean, not palatial. Do your homework and assess all of these areas adequately, you’ll be patting yourself on the back in the long-term. Keep all of the frilly stuff for the purchase of your own home, that’s where the emotion is better served.
Chris and Gayle Petch purchased a Hervey Bay property over the internet without seeing the property or having it valued. The couple fell in love with the coastal town after a family holiday, and was set on buying in the area. They took the sales agent’s word that the property was in good nick, but in fact, it was run down and required a lot of maintenance. They paid $175,000 for the property, a lot more than they should have, and spent another $15,000 on upgrades to the property. It was later valued at $145,000, $45,000 under what they’d already spent. They also struggled to rent out the property as a holiday home because of unreliable and mediocre property managers.
There is also the oversupply factor. In recent times, with growing populations and no sign of national growth slowing down, inner-city high-rise developments have been sprouting up all over the place. The high density of these apartment blocks has resulted in oversupply and under demand. The fierce competition has seen rental difficulties emerging as property managers struggle to find suitable tenants for the countless rental properties. Weigh in the fact that this situation can cause a property to go down in value, and you’re not left with a promising outcome. If we take the Docklands and Southbank in Melbourne’s CBD as case study examples: This high density residential area, or the ‘Concrete Jungle’ as it’s also labeled, is a recipe for rental oversupply disaster. According to SQM Research, the vacancy rate in the Docklands postcode is close to 9 percent. The CBD is a fraction over 9 percent, while Southbank has a vacancy rate of 11.5 percent. This is at a time when all capital cities other than Melbourne have vacancy rates below 2 percent, according to SQM Research. Melbourne overall sits at 3 percent, with its vacancy rate elevated by those inner-city areas. These alarming figures are playing havoc on investors, landlords and property managers in the area, all trying to rent out their apartments to little avail.
If Experienced, How Can Such Pitfalls Affect a Property Investor?
They are opportunities not catastrophes. If a tenant damages a property (as is often the case), it’s an opportunity to renovate and upgrade the house using the insurance money. This is a very opportune way to rejuvenate your property and as a result of the new renovations, the rent can be increased for the new tenant. Keep an eye on your landlord insurance contract and make sure you know exactly what you’re covered for before making a claim.
A great opportunity for a savvy investor is a downturn in the market – inexperienced investors think a dip in the market is bad, but experienced investors rejoice and know that adown turn in the market is a brilliant opportunity to acquire more stock and increase their portfolio. Think wisely about any property purchase. Is it a
growth area? Are there attractive services like public transport and schools close by? Are there no restrictions on renovations or development? If you can answer yes to all of these questions, then you’ve likely found a good buy.
Overseas real estate markets have recently had a massive downturn due to the Global Financial Crisis (GFC). Let’s look at the US. Aussie investors have taken advantage of the strong Aussie dollar and weak American housing market to purchase bargain properties in the US.
There’s a famous story about Eve, the single mother from Sydney, who was approached by buyers’ agents offering to buy her ‘bargain’ properties in the US. She was coaxed in by promises of strong rental returns. She purchased three properties at a cost of $166,300USD ($250,000AUD), plus spotter’s fees, which she paid for by mortgaging her own home. The properties were then trashed by tenants, costing Eve $95,000 in maintenance and repairs. All up she spent around $350,000 and she only stands to recoup about $37,000. Two of the properties have been sold for $8,000USD and $19,000USD, and the last is on the market for $10,000USD.
How can Property Investment Pitfalls be Avoided?
Didn’t your father ever tell you to protect your assets? Ours did. And like most of the time, Dad is usually right. Make sure you have landlord’s insurance – it’s tax deductible. It’ll be your saving grace when it comes to tenancy disagreements, defaults on rent and property damage and maintenance.
Have a savvy property manager take charge. Landlords who use real estate agents to manage their relationship with tenants are likely to face fewer problems than those who self-manage their properties, while landlords who go it alone often don’t follow basic property management procedures and end up in strife. Ensure you are receiving these benefits from your property manager:
- Maximum exposure – Feature advertising and listings on realestate.com.au and other relevant advertising outlets with no ‘hidden fees’ (unlike other agencies)
- Electronic onsite reporting – Property condition reports generated on site in real time through a property management application console and sent directly to you
- Routine inspections are carried out three times every year, and you’ll receive a comprehensive Inspection Report including supporting photographs and any recommendations the same day
- Rent arrears are among the first matters attended to on a daily basis. At the commencement of the lease all tenants sign an acknowledgment of a Rent Arrears procedure so that expectations are clear and you are kept informed of any incidents.