The 10 most common mistakes made by property investors.

[Mike]

Hi folks,

I've just read a 23 PDF doc I downloaded from a UK site recently which encapsulated all the important issues any property investor or newbie should know. Now with all the combined experience and wisdom of the people on this forum it shouldn't be too difficult to come up with a thread that matches this document. Remember one guy wrote this doc but we are many.

If we can do this then theoretically this thread could be the first and most important thread a newbie will read. So let's say a friend, son, daughter, brother or sister comes up to you and says, "Can you give me some advice about property investing so I don't make any mistakes? What would you say? When this thread is finished I will tell you where you can download this document and we can compare how our combined experience and wisdom fared against Peter's individual effort. Let the newbies judge the winner.

Regards, Mike

PS: Peter identified 10 important issues. How many can you come up with?

Please follow this link to "Great PDF and other sources" to download Peter Jones' PDF doc: http://www.somersoft.com/forums/showthread.php?s=&threadid=6336

 

[GeeVee]

What an interesting Idea Mike. My wife and I have a couple of IP's and we are feeling hamstrung as regards getting some more due to finance and servicability.
So I would think somewhere in the list your purchasing structure related to being able to continue to purchase and not tying all of your purchases together as security for each other.
What am I saying??? Make sure that your financing structure allows you to continue.

 

[gailh]

2. Not prioritising capital gains enough early on in the portfolio so as to facilitate future purchases

Gail

 

[Mike]

Great point to kick-start this discussion, Gee Vee. A common mistake people make when purchasing additional property is to tie them all together when it isn't necessary. I've made the same mistake and all my 3 properties are tied together. This is known as cross-collateralisation.

The banks get far more security than is necessary which puts you at additional risk. The other downside is that it is harder to refinance with other lenders or play that card when negotiating with your own lender for a better financial deal. Needless to say I won't be X-colling any more.

From my readings on the forum, I believe to avoid X-colling you open Line Of Credit accounts to finance the deposits on the extra properties.

Apart from adding my two cents worth I'll be also facilitating this thread to get as much good info as possible because Peter's doc is very good indeed and we will need to pull out all the stops to come up with something better. So if anyone can add some value to Gee Vee's point about keeping properties self-secured or if you have any other ideas we can discuss then let's have it. I expect everyone who's anyone in our brains trust to chip in with some pearls.

Interesting to note that I just scanned Peter's doc again to see if he touched on this issue and no he doesn't discuss the cross-coll issue but he does mention refinancing your properties as capital values rise to use as deposits. That was a minor point though and not one of his Top Ten.

Regards, Mike

 

[Mike]

Not prioritising capital gains enough early on in the portfolio so as to facilitate future purchases. - Gail

Thanks, Gail. I will add that when the market is rising a common mistake is to be too slow to react to the new equity in your portfolio. Advice I have seen on the forum over the years is to re-value your properties at least every 12 months and do something with that extra equity. Perhaps early on you will only be able to afford one property every two or three years but aim for one a year and then two a year. Don't have lazy equity. Get it working to increase your wealth.

Regards, Mike

 

[jgow]

You can say that again.
We bought a property in August last year with a valuation done on all our properties (X - Collied).
We then decided to unencumber all properties (4) in early december also with another re-value by the bank (ANZ)
well we had gained over $100K in equity in just 4 months.
WOW!
We are now looking for IP number 5 & 6
We are on the Gold Coast so these numbers might not seem so great if you are from Syd Melb.

 

[ani]

As a newbie to Australian investing, I'd say

1) you have done the right amount of research on a area when you can look at a property and know its value within 1-2% (and I'm nowhere near it yet!!)

2) don't overspend on renos - my formula is max. 15% of value

 

[investor]

Hi everybody

- Know the area you want to buy in well. So you don't pay too much. That goes for sales and rental. If you are interested in CG make sure that area has performed well in the past 20 years.

- DO NOT SPECULATE. If you want to gamble go to the casino. Stick with established suburbs in the begining , you can't go wrong and buy well.

- Know which are the best steets and the past sales for at least 3 years.

- Don't buy the best house in the best street, buy the worst house in the best street and fix it. You create immediate CG which you can use to purchase another IP straight away serviceability permitting.

- When buying IPs, be cold and calculating don't buy with your heart buy with your head and bargain hard.

- Be careful not to underestimate repairs, and don't overcapitalise for your chosen area.

- Have the correct accounting structure in place, and be familiar with the tax laws for instance if you want to sell the place in a few years know that u have to live in it for a little while first to avoid CGT.

- For development purposes even for larger renovations, know your Development Control Rules for your area. It would be very disappointing to later find out that you can't do that extention or biuld that granny flat that the real estate agent said you could.

- Remember both cash flow and capital gains are important. Without cash flow you will find it hard to service many IPs, and without good CG to create equity in your portfolio you cannot even consider future IPs.

- Keep good records of your IPs.


Investor

 

[Alan H]

1. Research, learn and observe as much as possible before your first IP purchase........but then ACT! All the research in the world will amount to very little unless you actually get in there and purchase.

2. Don't beat yourself up if your first IP purchase doesn't turn out to be 'ideal' in all aspects. There is a huge learning curve before you purchase but inevitably there will also be things you won't learn until you actually get in there and have your first IP. NB. Do try to 'improve' your purchases each time but accept that very few 'gurus' get there without putting in the 'hard yards' from experience.

3. If your a couple, try and learn together. Make the process as inclusive as possible.

4. There are many people out there that can help you along the way, but at the end of the day, be confident with your own decisions and direction.

..............and many, many more which I'm sure those wiser than I will add.

 

[stirling]

1) Always check any statements made by real estate agents.

2) Always check any statements made by tenants on rental applications.

3)Never rent to friends or relatives.

4)Never stop learning.

5)Keep an open mind to other methods of making money from real estate. Your way may not be the only way.


Stirling

 

[michaelg]

Hi,

Always maintain control of a deal. Especially during settlement, there are many people involved;

- You
- Your lender
- Buyer's/Seller's Lender
- Your solicitor
- Buyer's/Seller's solcitor
- Agent
- Tenant

Everyone one of these people will believe they think they know what's best. Everyone one of these people don't care if your deal fails.

By control I mean knowing exactly where you are in the deal. Make sure settlement is long enough (don't be pressured into a short settlement to suit other's).

If the lender says you need documents, make sure you have them in due time, don't wait for them to call you to say they forgot. Ask for deadlines on everything.

Make sure you solicitor does their paperwork on time.

Don't let their's or your tenant, control the deal either. Maybe get a letter in writting that states they understand the situation.

Get any agreements in writing. Someone's word doesnt mean a thing if settlement is delayed and you're paying penalties.

Get know the people involved in the deal, don't be afraid to ask for contact numbers. You'll be surprised to find the need to call a mobile at 16:45 in the afternoon to confirm some details to be sent by fax to ensure something is done on time.

There have been many times when Ive had to facilitate and co-ordinate between the agent, buyer, seller, and both solicitors. The agent is NOT the point of contact. After a deal goes unconditional YOU are the point of contact for everyone. Make this clear to everyone and let people call you if they have problems. Its much know the status of the deal, let all parties feel comfortable about calling you at any time. A 5min call now could save $$$ in penalties later.

Just a thought
Michael G

 

[Carmel]

Perhaps, not defining what the GOAL is in the first place for the investing, and staying focussed on that goal? Being quite clear about your goal (whether capital growth or cashflow) helps you stay on track & make decisions.

 

[Mr Ed]

Composure! Composure! Composure!

Property isn’t a quick ride to becoming a millionaire over night for the beginner, nor is it something you do after a BBQ at a friend’s place or an emotional decision from a seminar.

For the beginner it’s a long-term deal (5 – 7 years). It is only when you earn your strips of involvement, through education (from making mistakes, and paying for your education (I think I heard it once called)) that you can continually put together the better deals to become that (so called) overnight millionaire.

Therefore small deals in the early years and progression from there

I’m yearning to get more strips!!!!

Mr Ed.

 

[Mr Ed]

Don’t bit off more than you can chew…

You must be able to hold the property emotionally and financially, if it is vacant for 9 weeks it mustn’t upset the household (ie Mumsie must still be able to buy the groceries).

Don’t choose the dump in spear chuckers lane for yield if you can’t handle the grief attached.

You must retain the SANF (Sleep At Night Factor)

Mr Ed

 

[Sunstone]

Dear guys,

A couple more:

-Leading on from having a goal. Make sure you define a plan for getting there.

-Have you made a SANF allowance? What is your safety blanket when interest rates rise? (Yep Mr Ed you just beat me to it
:---) )

-Have you factored in vacancy, PM fees, and maintenance costs?

-Look at ways to reduce costs. (Eg. On insurance increase your claims excess. I have insurance to save a house falling down or having a truck drive through it, not to repair a cricket ball through a window.) Saving money prudently is another way of earning money.

-See through the exaggeration/lies of over zealous sales agents. Again do your own due diligence.

-Have a property checklist. And always ask WHY the seller is selling.

-Settlements almost NEVER go without some sort of hiccup. Plan your finance timeframe according. A delayed settlement eg. 60 days instead of 30 days is the preference.

-Always have the property checked just before settlement. If you find it is not in the condition as it is in your contract advise quickly in writing and don't settle until it is rectified.

-Mortgagee in possession does not mean instant goldmine.

-Do not invest by preference with family/friends. If you do make sure there is a written agreement in place with clearly defined exit options and individual party responsibilities (eg. maintenance.)

-Always take a rental bond and put a written tenancy agreement in place. (Note this does not always happen. My latest did NOT have this. No bond and only a verbal rental agreement.)

-Books and free online education is worth more than $15K "guru" property seminars.

-Australian's (I'm sad to say) always like to drag down people that are are doing better than themselves. Remember this and take your critical advice from those with credentials you can believe in. Not from zero IP "gunnas". (This includes many of your relatives.)

-Understand the fundamentals differences between apartments and houses.

-Don't stop looking after your first one. This is a journey and your destination doesn't stop at IP one.


Well there's a couple. Good thread Mike. Are you going to process this document in the end?

Cheers,

Sunstone.

 

[brains]

Originally posted by Mr Ed
Don’t bit off more than you can chew…

You must be able to hold the property emotionally and financially, if it is vacant for 9 weeks it mustn’t upset the household (ie Mumsie must still be able to buy the groceries).

Don’t choose the dump in spear chuckers lane for yield if you can’t handle the grief attached.

You must retain the SANF (Sleep At Night Factor)

Mr Ed

Mr Ed,

What or where is "Spear Chuckers Lane" ?

 

[brains]

"Have you made a SANF allowance? What is your safety blanket when interest rates rise? (Yep Mr Ed you just beat me to it
:---) ) "

Sunstone,

Do you mean Safety Net?
___________________________________________

My $0.02 worth.

Educate yourself for 6 months - 1 year before buying your first IP.

Never forget the saying:

"You make your profit when you buy, not when you sell"


Squeeze everyone involved in the deal to your benefit,
(ie: negotiate everything)

Get the best interest rate from your lender.
Buy the property for the best price that you can.
Get the best insurance premium price.
Screw your property manager hard, especially if you have a few IPs with them......etc.......


and plenty more......................

 

[Macca]

Investing in property is a long term investment, Be Patient. It is not always going to be like the past 2 years.

You need to be able to service your debts even if interest rates go up 2%, know what your repayments will be if interest rates should rise.

Have a cash buffer available for emergencies, repair needs to be done ASAP. This could be an undrawn credit card limit, but it needs to be available at short notice.

If you can't afford to buy in the area you live in, do some homework and buy your IP in somewhere you can afford

I can see this thread developing into IP101, exams to be set every November

 

[GeeVee]

Note to Mike: I am enjoying this thread. There is going to be a bit of work in finalizing the top 10 rules out of all this terrific advice. I'll just keep reading and saving!!
Thanks everyone so far. This has the possiblity of being the best and longest thread ever!!!

 

[Jas]

Originally posted by Macca


I can see this thread developing into IP101, exams to be set every November

Exams are set, every time interest rates jump 3+ points.

My addition to the rules is - network. You'll never know who has what you need unless you ask.

Jas