With the recovery in the housing market property investors are more active now than they have been since the boom of 2008. We have noticed the reappearance of property investment mentoring programmes who offer coaching on how to make money from property investment. Given the fallout that we saw from some of our clients that attended these courses who followed the advice we thought now would be a pertinent time to learn from the mistakes that many of these property investors made.
One of the approaches that these organisations advocated was to purchase property using 100% financing. While this meant that investors could purchase without using their own cash resources the fall out of this came when property prices came tumbling down meaning that investors couldn’t sell their asset if they wanted to. If investors were in it for the long haul this wasn’t an issue as they simply weathered out the crash. However if investors were in a position where they had to or wanted to sell they couldn’t. This put huge financial strain on some households and even resulted in some foreclosures.
Another approach was to purchase several properties at once. The was a risky strategy as often when investors entered the market they would make mistakes and if they had several properties they made the same mistakes several times over. We have always recommended when entering the property investment market to purchase one property get that settled and running smoothly before purchasing the other. That way if a mistake was made it was limited to one before the lesson was learned.
Many property investors wanted to get in and sell up quickly to make a profit. This is not property investment this is property speculation and with any speculation there can be great risk. That came when the market crashed and people were left with properties that they hadn’t intended on keeping or had devalued.
We often saw property investors work only on the expected rental return Vs the outgoing costs. While this is of great importance there were other factors that could affect the value of the investment including – the nature of the property and how easy it was to rent. There are often factors that cannot be quantified and the numbers don’t always tell the full story as to the risk that investors would be taking on and example of this could the location of the property.
Another dangerous tactic was investors working on “best case scenarios” ie maximum rent and minimum expenses including interest rates. We advocate working off an interest rate of at least 8% as this is the average interest rate since the introduction of the Official Cash Rate in the 1980s. We also suggested working off a lesser rental in case the property became vacant and a new tenant was needed urgently or there was a glut of rental properties on the market. And finally we would suggest working off a tenant occupancy of 48 weeks in case tenants left and it took time to replace them. We would also suggest having an allowance for repairs and maintenance.
And finally we saw clients investing all their funds in to the purchase without having access to any other cash resources. We advocate having a cash reserve (even if it’s borrowed) to allow clients access to funds if they lose a tenant, if the tenant stops paying rent, if there is damage to the property or if there is essential repairs to be done.
Property investment is a great way for wealth creation but there is no one size that fits all and the cheapest way to learn what is right for you is to not only learn from those who are advocating the benefits of property investment but to learn from those who have made costly mistakes.
