Four mistakes all property investors must avoid

When you look at the facts, despite there being over one-and-a-half million property investors in Australia, most don’t own more than one or two properties, which means that most property investors don’t ever develop the financial independence they desire.

In fact, only one in 200 property investors owns six or more investment properties, and you need at least that many to become financially independent.

Now that’s something to think about, isn’t it?

With our property markets now moving forward I would like to outline four of the common mistakes I’ve seen investors make, so you can avoid them and make the most of the new property cycle.

1. Buying the wrong property

While all properties increase in value over time, some increase in value significantly more than others. To build financial freedom you need to own the right type of property – one that grows in value sufficiently to enable you to borrow against your increased equity, giving you the funds to purchase further properties.

However, when you ask investors why they purchased their property they’ll say things like: it was close to where they live, close to where they holiday or close to where they want to retire. These are all emotional reasons for buying property, and while possibly a good way to buy your home, they are not the right way to buy an investment property.

2. Not having a plan

Most Australians spend more time planning their holidays than they do planning their financial future. If you don’t have an investment plan, how can you hope to develop financial independence?

I have found most Australians fall into four categories:

a. They don’t invest at all.
The majority of Australians fall into this group – they just haven’t taken action yet.

b. They don’t invest enough.
Many Australians have bought a home and understand the power of appreciating real estate, but they want to pay off their home before they invest in more real estate. This means they are not using the untapped equity in their home to further their financial independence.

c. They invest too much.
Some people invest too much – yes that’s possible! They have taken unnecessary risks and borrowed too much. Some of these investors came unstuck over the last year or two as property values fell, while others will run into trouble as interest rates rise in the future.

d. Those who invest the right amount.
Then there are those who invest just the right amount. Not too little. Not too much. They invest the right amount – sounds a bit like Goldilocks doesn’t it?

These investors have an investment strategy and their investment property purchases are part of this plan.

The problem is that if you don’t have a strategy it’s easy to get distracted by all the “opportunities” that keep cropping up.

Unfortunately many of these “opportunities” don’t work out as expected. Look at all the investors who bought off the plan or in the so-called next “hot spot”, only to see the value of their properties underperform.

3. Not reviewing their property portfolio

Sure, property is a long-term investment and the costs of buying and selling real estate are considerable, but that doesn’t mean you should fall into the trap of not reviewing your property portfolio.

Of course you can’t easily “swap” properties or reweight you property portfolio like you would shares. But that doesn’t mean you shouldn’t regularly review your portfolio to see what you can do to improve or upgrade your properties.

When was the last time you checked to make sure you were getting the best rents or that your mortgage was appropriate for the current times?

Maybe it’s time to refinance against your increased equity and use the funds to buy further properties?

And sometimes it is appropriate to consider selling an underperforming property to enable you to buy a better investment.

It’s a bit like going to a financial planner to review your share portfolio or super fund. He’d say something like, ‘We are starting an economic cycle so now is a good time to see which sectors will perform best over the next few years and which shares will outperform’. So you would sell some shares and reweight your portfolio into sectors that will outperform.

It’s much the same with your property portfolio.

Do you own the type of properties that will allow you to take advantage of the next property cycle? Remember, over the next few years some properties will strongly outperform others.

If you own secondary properties or real estate in areas that are unlikely to benefit from strong capital growth, it may be worth selling up and replacing them with the type of property that will help you develop long-term financial independence.

And the last common mistake I see investors make is…

4. Not managing their risk

Many investors don’t understand the risks associated with property investment and therefore don’t manage them correctly.

One common error I see investors make is not having sufficient financial buffers to see them through from one property cycle to the next.

Smart investors don’t only buy properties; they buy time by having financial buffers.

They have sufficient financial buffers in their lines of credit or offset account to not only cover their negative gearing and see them through the down times like we experienced in the last few years.

Another way smart property investors protect their assets is to buy them in the correct ownership structures to legally minimise their tax and protect their assets. I have found that most wealthy property investors own nothing in their own names, but control their assets through companies or trusts.

Australia has now moved into the next stage of the property cycle

The three major property research houses – RPData, Australian Property Monitors and Residex – as well as the Australian Bureau of Statistics, broadly tell the same story: the property markets turned in the middle of last year.

According to APM’s monthly index, Sydney and Melbourne prices have appreciated at annual rates of 6% and 7% respectively since June 2012. RP Data offers a similar picture, with monthly dwelling values in Sydney and Melbourne rising at 7% and 6% if projected on an annual basis since they bottomed in May 2012.

Yet in this cycle, just as in the past, some property investors will do very well, but many won’t. Let’s make sure we learn lessons from the past to help us secure our futures. I’ll be sharing exactly what I’ll be doing together with a group of leading property experts at my National Property Market & Economic Update one-day training events around Australia in March and April. Get full details here.

Michael Yardney is a director of Metropole Property Strategists who create wealth for their clients through independent, unbiased property advice and advocacy. He is best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Update blog. Subscribe today and you’ll receive a free video training: The Golden Rules of Property Investment.