Common Mistakes That You Must Avoid while buying an Investment Property
Starting in property investment can be a confusing time. While you may spend a lot of your initial research figuring out what to do right, it’s also essential to be aware of the property investment mistakes made by beginners. Here are six common investing mistakes to avoid.
Relying on past growth
There’s a good chance that you’ve heard the phrase “Past growth is not an indicator of future growth.” But let’s unpack what this means.
Investing in suburbs that have previously been a popular choice is not always recommended as an investment strategy. This is due to the “regression to the mean” theory, where an extreme event or boom in the market is followed by a drop or the market averaging out.
While property prices will generally rise about six to seven per cent per annum over the long term, no suburb in Australia will consistently grow linearly. If you are looking at a suburb that has risen by 40 per cent in the last 1 to 2 years, then there is a good chance that this will drop.
So, if you’re buying in a suburb that’s grown significantly, you are purposely accepting potential underperformance in the future.
Instead, when looking at locations as potential investment opportunities, it’s best to be buying suburbs that have underperformed in the past. It would be best if you still found the suburbs that are at the bottom of the market. But this should not be the only indicator relied upon. Similarly, underperformance in the past doesn’t guarantee outperformance in the future.
Relying on trends
Some of the most common real estate mistakes stem from misconceiving trends and buying in the wrong location as a result. While there are a number of these examples, the most common is vacancy rates and renter proportion.
Many new property investors see low vacancy rates (usually 3% or lower) in an area and perceive it to be one worth investing in. While this trend is a positive sign, it’s a good idea to ensure that vacancy rates have been at this level for the last 2-3 years. While it may be less than 3% now, this may be a rare occurrence, with vacancy rates rising back to normal in a few months or years.
Another common mistake is relying on renter proportion trends. Many newcomers will look at a suburb or area where 40-60 percent of the houses are investment properties and think that it’s a good sign. If other investors are buying in this area, then it must have potential.
But relying on this trend can be a problem. Fierce competition amongst landlords and property investors often means that tenants have ample choice. A wide range of options for tenants usually means that rent prices won’t rise in that area.
Lack of research and due diligence
Choosing the wrong property can often result from not researching, or not correctly researching, the suburb or area.
While sites like Domain or realestate.com are okay for entry-level research, it is essential not to rely too heavily on these for all your research. These sites aren’t equipped to properly analyse the many different data points needed to make an informed decision. These companies also have specific agendas, which might involve manipulating the data to the point where it can be misleading.
Proper research and due diligence involve analysing a range of quantitative and qualitative fundamental data factors for each statistically reliable suburb across Australia.
This involves more than just population growth and the proximity of the property to schools and hospitals but also involves average vendor discounting, stock on markets, building approvals, online search interests, and more.
When it comes to proper research, be cautious of COVID bubbles that are occurring at the moment. Look at the data before COVID to see if the suburb is sustainable outside of current global circumstances.
Cutting out the experts
With the plethora of information available now on the web and social media, it seems that everyone is an expert. While it is a good idea to be mindful of opinions and trends, you will need to trust experts and professionals, especially as a beginner.
For example, if you are looking for the advice of a property consultant or buyer’s agent, it’s a good idea to look at their history and investment experience. If they haven’t demonstrated the level of success you aspire to, then look to another expert.
Similarly, an investment-savvy mortgage broker is essential in the property investment journey. Cutting out a mortgage broker to help you with property investing could prove to be a costly mistake. They are the experts in getting the right product from a lender which aligns with your resources and goals.
Limiting your options
Many of those new to investing will only look to invest in suburbs in their backyard. But this means not being open to the 15,000 suburbs across Australia that have plenty of potential. And with the ability to analyse the data factors from the comfort of your own home, there is no real reason to limit your options. Don’t make the mistake of missing out on a great deal just because the property is in another postcode!
Investing alongside other investors
Before getting lured into a high-demand suburb or area, it’s a good idea to know whether it’s due to owner-occupier demand or investor demand. Owner-occupier demand means first home buyers and upgraders create the majority of activity, price growth, and sales.
This is referred to as a ‘sticky market,’ as often these buyers will ‘stick’ around, having only purchased their first home or spent plenty on upgrades. Investor demand is demand charged by investors buying up in that area.
Investment speculation and the ability for these investors (especially those with multiple properties) to quickly liquidate their assets creates an unreliable market. This can cause an increase in supply and a reduction in demand, which means prices go down in that suburb.
Knowing what is fueling demand in a particular area is highly recommended so that you can avoid the mistake of buying alongside other investors.