The 10 most common mistakes made by property investors.

[bagg]

Never sell - unless you absolutely have to or it makes VASTLY greater sense to.
If you are tempted to sell, think about it, then don't.

I sold 2 properties 3 years ago because I wanted to be less encumbered (!) even though they were positively geared and no problem to keep. Would be substantially better off now if I still had them of course!

Really this is rule is: "Invest for the long term."

bagg

 

[geoffw]

Nobody has mentioned yet- the most important mistake, IMO, is not coming to the forum here to search and to ask

 

[Sunstone]

"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?

Dear Brains,

Yep something like that :----------------)

Safety blanket, net, trampoline............. bouncing cats.

No distractions on this great thread :-----------------)



Additional Idea:

-See if you can get a mentor?

-Repairs don't always need new material. See where you can find recycled materials from old demolition sites to achieve the same purpose.

Cheers,

Sunstone.

 

[Mike]

Hi Folks,

Occasionaly as you read through the forum you'll come across the term exit strategy. What does it mean? Well the definition, according to www.investorwords.com is "The way in which an investor plans to close out an investment." The term is also used in the business and stock market worlds. Often an investment is made with a particular outcome in mind but occasionally things go wrong due to unforseen events and an appropriate exit strategy may be to "sell, cut your losses, and reinvest your remaining capital somewhere more profitable". A common mistake is not to have an exit strategy.

Buy and Hold investors may say that they don't need an exit strategy because they don't ever intend to sell. However, someday they will have to consider who the beneficiaries of their estate will be. How will the property be transferred? If the property still has debt attached to it the beneficiaries may have to sell the property to clear the debt. Downside of that is property may have to be sold in a buyers market where full market value may not be realized and then a hefty capital gains tax bill to pay. The alternative may be to setup a trust where the beneficiaries just receive an income from the trust.

What happens if you are retired and need more income than the properties are providing in rent. A possible exit strategy may be to buy a Reverse Mortgage such as St George's Seniors Access loan. This is a strategy that may appeal to asset-rich but cash-poor retirees who don't wish to move out of their home. Their beneficiaries may be none to pleased with this approach, though, since the interest on the loan is capitalised and will have to be cleared one way or another.

Generally speaking, though, the main exit strategies are Buy to Hold, Flip or turnover, Lease Option or Wrap.

With Buy and Hold you want the tenant and the taxman to pay off the property. After 10 or 20 years you may sell before the maintenance costs eat into your profits too much and to clear some debt.

Flipping property is when you want a quick cash sale and a rising market is when you are likely to do this because the inherent risk of finding willing buyers is reduced. During the last cycle many investors attempted to hold multiple units and townhouses in new developments with deposit bonds or options. Some of them mistimed the market and found themselves holding properties which they could not sell or settle on. I thoroughly disapprove of this practice for newbies because good investment practice is to commit only a small percentage of your capital to speculative ventures. Many of those people who did that borrowed the money to buy the deposit bonds for heavens sake! Big, BIG mistake.

An exit strategy that some developers use when normal buyers have dried up is to lease option the property. Usually there are willing buyers who just lack a sizable deposit to buy outright but have enough income from their job to make the monthly repayments. Wraps works on the same principle although professional wrappers aren't wrapping as an exit strategy but as a business strategy. Their exit strategy is either to buy out the purchaser and wrap to someone else, or to hold and rent the property.

Switching topics onto a related issue and that is how to buy your first property. Many years ago, due to my own ignorance I thought a person's first property must be their home and in order to achieve that I must SAVE for a deposit. Well, no matter how hard I tried to save, the cost of property kept rising and I couldn't bridge the deposit gap. Big mistake. Cost me years of capital growth. Missed the boat during the property boom of the late 80's.

Instead of putting my money into a low interest savings account where the interest is also taxed I should have put it into a property trust fund and eventually borrowed more to gear the investment. Then with a decent size deposit I could have bought an investment property with a lease option and rented it. Refinancing the IP I could exercise the option and have my first IP. Can I have my time back again, please?

Will be back later with some more thoughts.

Regards, Mike

PS For those not already familiar with Reverse Mortgages here is a more detailed description plucked from the net:

Home Equity Conversion

A good deal of the assets of Australians are in their homes. About 75% of older Australians own the home where they live and they owe very little or nothing on the property. Home equity conversion or a reverse mortgage involves a reversal of the cash flow associated with the traditional mortgage. The equity in the home is converted into an income stream whereby the homeowner receives a regular cash payment until his or her death or the house is sold. This can appeal to those who have a substantial equity in their home but don't want to move to a smaller and cheaper property, so unlocking some of their capital.

One bank offered reverse mortgage products in the 1990s but lack of consumer demand resulted in their withdrawal.

In December 2002, St.George Bank announced the launching of the Seniors Access Home Loan, which is a reverse mortgage home loan.

Mike: An example of a Reverse Mortgage offered by private investors...also known as Sell and Stay.

Your house is sold to a private investor. The investor agrees to a leaseback for life or some other agreed term. If the vendors are a couple, both must pass away before ownership is transferred. The investor gives the vendor around 30% of the purchase price in cash and the balance of the purchase price is payable without interest upon vacant possession of the property. In return the vendor pays no rent or expenses of a capital or structural nature. However, the vendors are liable for all other expenses such as insurance, rates, etc.

One example will make things clearer

A property worth of $400,000 is sold with a cash payment of 30 per cent ($120,000). This $120,000 is transferred to the vendors and in return they receive a leaseback for life. The balance outstanding ($280,000) is payable, interest free, at the end of the lease (in this case assume that the vendors pass away in 10 years time). The balance of $280,000 is now due to be paid to the estate of the vendors but ownership of the property has passed to the purchaser who granted the original lifelong leaseback.

The major drawback in the reverse mortgage scheme is that ownership passes at the initial cash draw down stage and any future capital gains are passed on to the purchaser.

Obviously, a reverse mortgage scheme may not suit everyone. However, if someone needs access to their equity in a home and have reached retirement, it is an option that is worth considering.

 

[Jas]

Plan!

Plan your 10-20 yr goals, get a five yr 5. Figure out what you are doing this year.

Decide what you want to do with each property and get it organised beforehand!!!!!!

Jas

 

[Kevmeister]

I like this concept, which I read somewhere:

"If you cannot completely explain the deal to somewhere else, you don't understand it well enough yourself".

OK - so I'm yet to buy my first IP. But here's what I would consider some of the things I'll be "keeping in mind" (in no particular order):

1. Research research research. Know the value of the property you are buying. Know the rent charged in that area. Know the potential capital growth (if that's what you are investing for). Know what facilities are available in the area you are purchasing. Know the type of people who live in the area - is your property matched to that demographic. Are the facilities near your property appropriate to your tenant demographic (ie. DINKS/yuppies might live in apartments so a nearby school is *possibly* irrelevant).

2. Protect yourself. OK - trusts might well be the way to go in terms of being the purchasing entity, but I'm talking little things like a proper subject-to-finance clause on the contract, subject-to-valuation, subject-to-pest-inspection, whatever. Numbering and/or initialling each page of the contract.

3. Don't assume everything will be rosy. Don't assume you'll get a tenant the day after you settle. Don't assume your house is so nice that you'll never have a vacancy. Don't assume the hot water service won't explode for 7 years. Don't assume your tenant won't trash the place. Don't assume your tenant will pay your rent on time. You need to be able to support the property in spite of these setbacks.

4. Don't rely on the agent - they work for the vendor! Substantiate what the agent says with impartial advice if possible (eg. an agent might overquote the likely rent for a property he is selling, and underquote the likely selling price).

5. Think with your head, but don't forget your heart. You might fall in love with a cute cottage but what do the numbers say? You might find a complete dump that suggests massive yield but will you realistically get a tenant quickly (or a good tenant) if it is a dump?

6. Land appreciates, buildings depreciate. Land content and the scarcity of land (in that area) influences capital growth.

BTW, this is a great idea Mike - I've learnt so much on this forum I'm starting to become overwhelmed by the amount of information I'm trying to retain!

 

[Jas]

Originally posted by Kevmeister
BTW, this is a great idea Mike - I've learnt so much on this forum I'm starting to become overwhelmed by the amount of information I'm trying to retain!

This is what I like about newbie qs - they make you think about what you've experinced/read in such a way to explain it clearly to someone else.

Jas

 

[GeeVee]

question for mike

Mike, How is the thread standing up? Has it covered the points that you have from the pdf?
Or do we need to try harder??

 

[Mike]

Young family buys nicest house in the neighborhood in spite of appraisal problems -- Loss: $20K

In summer 1993 I brokered a loan for first-time buyers in San Jose.

They were referred to me by former clients and worked with a real estate agent "team" in San Jose. They fell in love with this beautiful home, the most expensive house in the neighborhood. The appraiser had a tough time finding comps to substantiate the sales price.

I advised my clients not to buy or to re-negotiate.

Now, I was "only" the loan broker. The buyers consulted with me more than with their agents, who were rather incompetent. The buyers wanted the house. The lender's appraisal review required two additional comps.

Most buyers don't understand that an appraisal is very subjective.

It's an art, not a science.

As loan broker I have received countless calls from appraisers asking me if I "have" to have the property appraised at the sales price. Your average loan broker will NEVER kill a deal, never tell a borrower that they are paying too much, that there are potential problems in the neighborhood, etc. Many loan brokers as well as bank loan officers get most of their business from real estate agents and builders.

If a loan broker was to tell a buyer anything negative about a property and the agent found out, he or she wouldn't get another referral from that agent.

It is SO important to understand how this business works. One hand washes the other. Often federal laws prohibiting kickbacks for loan referrals are ignored.

Every marketing seminar includes "partnerships" between real estate and loan agents.

They will compliment each other in front of buyers/borrowers, they'll put on this great show. And it works.

Anyway, let's get back to our buyers in San Jose.

They bought the house.

An important factor was that they were frustrated due to the tremendous amount of problems with their "agent team."

The agents were not very good at returning calls and often had no answers to the buyers' questions.

I still remember when the buyer called me, VERY upset because he thought they didn't have enough cash to close.

The agent had quoted $2,000 for fire insurance.

Usually the premium ran around $300 to $400. Since I wasn't familiar with the area I was also worried that maybe we needed flood insurance or some special circumstances applied. Eventually we got insurance for only a few hundred dollars.

Apparently the agent just didn't have a clue.

At a certain point buyers as well as sellers just want to "get it over with."

That's what agents count on and that is why so many buyers just try to close no matter what. There are literally thousands of houses for sale every year just in San Mateo County. Often buyers act as if they're trying to purchase the last house on the planet.

My clients called me in early1995 to order a new credit report to ensure that there were no problems.

They were moving to Texas, had an offer pending and were going to take a $20,000 loss.

A great way to lose equity is buying the most expensive house in the neighborhood or a new home.

I know, the models look great! But it's just like buying a new car. Drive it off the lot, and you IMMEDIATELY lost several thousand dollars. Ever try to sell a "used" house in an area with ongoing new construction?

In the 90's, all my clients who bought new homes in the East Bay and later sold LOST money. Read in the BayHouse Forum the discussion on new homes.

Source: http://www.bayhouse.com/mistakes.shtml

 

[Mike]

First-time buyers purchase over-improved property
Loss: $20K+ in less than a year

In 1990 I spent a lot of time working with a young couple.

They had 10% down and were looking in the $300,000 range. We wrote up several offers, always asking for a seller second as they couldn't otherwise qualify for the loan. None of the sellers agreed to finance.

Eventually they found a FSBO (For Sale By Owner) in San Bruno near Skyline College with an asking price of $349,000. If you are familiar with that area, you know that it was way overpriced.

I advised my clients not to buy the most expensive house in the neighborhood.

The prevailing sales were around $260K to $270K in that area at the time. "Their" house was by far the largest and nicest house. My clients really had to have that house.

The sellers listed the house and we submitted an offer, but the sellers refused to finance.

I quote from my fax to the listing agent dated Nov. 1, 1990 "The buyers would only want to pay $275K with the sellers' terms."

I recommended that my clients let the property sit for a while.

We agreed to take a break from the home search until January. I thought the sellers would be more realistic by that time and we could try again then.

A couple of weeks later the property had a sale pending. I was stunned. Who would purchase that overpriced house?

In January my clients had some excuses why they wanted to wait for a while. I thought that was odd and after the sale closed, I checked the public records.

Sure enough, my clients owned that house.

I ordered a property profile and just couldn't believe my eyes. They had purchased the house for over $295K. The brokers had carried a second loan jointly with the sellers and they got a World Savings ARM (Adjustable Rate Mortgage - equivalent to our Variable Rate mortgage - Mike).

Half a year later the property was back on the market. I have no clue why they were selling, but it could have been my curse. I had sent them a postcard "I hope you'll enjoy your new home as much as I enjoyed working with you." Needless to say, I don't enjoy working literally hundreds of hours without getting paid.

There seem to be several lessons in this true story.

The house eventually sold in the $270s and according to the MLS (Multi Listing Service), commission was offered to the buyer's agent.

My most conservative estimate is that they lost at least $20,000, but more likely $30,000+ in less than a year.

Source: http://www.bayhouse.com/mistakes.shtml

 

[investor]

Originally posted by Kevmeister

OK - so I'm yet to buy my first IP. But here's what I would consider some of the things I'll be "keeping in mind" (in no particular order):

Hi Kevmeister

Your posts are LOOOOOOOOONG.

If you didn't keep on mentioning that you haven't bought your first IP yet I'd think your on your 5th or 6th by now.

I take a deep breath whenever I start reading your posts and I enjoy them quite abit. You seem to be quite well informed and have done your research more so than most.

Keep it up son ( although you are probably older than me ).

Regards

Investor

P.S May I suggest you visit us in the chat room every now and then. Maybe we could encourage you further to take that first step.

 

[elwyn.d]

What Alan H said 'ditto'
I have had a couple of people ask that question.In each case I have said have a read of Jan S books first.
Ask yourself if its something new or old. What are you prepared to do. Remember the SANF.
Buy a property, sit back and learn. Read Talk Watch.
Buy another.
I am not a big fan of developing a 5/10 year plan. In 3 years I have gone beyond what I would have dreamed possible. My learning curve has been a vertical line since day 1 and my own confidance has risen with it.
Dont be afraid of making a mistake.


Hope this has helped Elwyn.D

 

[Philby]

Reading this thread makes me more determined to get in there and "just do it"
But the main issue that is always promoted is "research" and we are no way near satisfied that our research is complete. So steady as she goes at the moment.
The other side to this is "Paralysis by Analysis" and being distracted by another "brainwave" and shifting our focus to another area of Australia that is going to be the next hot area! Or the case of "you should have been here yesteday!"
I have said it before (so please ignore my repeating platitudes) - as a newbie I cannot adequately express how grateful I am to all you people out there sharing advice, wisdom and just mentoring remotely.
I kneel down at the altar of the Forum Gods and seek your blessing, blah blah blah

 

[Jacque]

Great thread Mike- I hope that a shorter format comes out of all our ravings

Ah, common mistakes........ there have been so many great responses already and I will be repeating some so I apologize in advance.

1. Not doing enough research- Inspect at least 15-20 similar properties before you even think about making a decision. Agents can be very clever in fooling you into believing that:
"This won't last long"
"It's just listed and it'll be gone by the weekend"
"You're not going to get a better buy- I'm telling you"
"Look, there's already an offer on it but..........."
etc etc
(No offence intended to the respected agents here- asy, sam etc)
Be strong and persist on looking. There is no rush!

2. Not researching the rental market and what the rent will really
be. PM's are the best source for this information and a good
one will help you out enormously.

3. Rushing into finance- take time to work out who has the
cheapest money on offer, as well as fees etc. A good broker
is the best option here.

4. Underestimating reno costs. Get quotes for major items
before you even start looking so that you have some idea.
Agents are great ones for saying "Just spend a couple of
thousand on a new kitchen and she'll be right, mate!"

5. Have a reason/goal for what you are doing and HOW. Don't
blindly rush in without knowing why you're doing it.

6. Taking on the advice of family/friends when they often have
no IP's themselves, or their's are in a different area/price
range etc.

I could add more but it's time for lunch!
Keep up the good work Mike

 

[Mike]

Hi,

Watching the CNBC news the other night a story came up which I thought could also have relevance to us. If you type identity theft into Google you'll get plenty of info about it.

In a nutshell, identity theft occurs when a criminal uses another person's personal information to take on that person's identity. Identity theft is much more than misuse of a Social Security number - it can also include credit card and mail fraud.

Identity theft is the top consumer fraud complaint in America. Up to 900,000 people will become victims this year.

According to the U.S. Federal Trade Commission, it takes 14 months, on average, for a victim of identity theft to notice the crime.

Once noticed it can be costly in terms of hours and money spent to rectify the credit impairment.

A number of things can be done to guard against identity theft which this website will outline: http://www.fightidentitytheft.com/ but the first thing to do is to get a copy of your credit report to see if any new accounts or credit inquiries show up. Virtually all of your credit information is in your credit report. If someone is opening accounts in your name, it should show up there. Get a copy at least once a year. Make sure it is accurate and only includes those activities you've authorised.

In Australia, to obtain a copy of your personal file free of charge you can mail your request to:

Baycorp Advantage - Public Access
PO Box 964
North Sydney NSW 2059

Alternatively, you can fax your request to Baycorp on:

(02) 9951-7880

Please provide Baycorp with the following information:

Your full name;

Your date of birth;

Your driver's licence number;

Your current residential address

Any previous residential addresses within the last five years;

A daytime telephone number and

Your signature.

NB: Baycorp advise they are unable to accept requests for their free service via email.

Baycorp should mail you a complete copy of your personal file, including any public record or commercial credit information within 10 working days of receiving your request.

NB. Baycorp do not offer a free service for company or business files. Requests for company or business files can only be accepted from the company director or secretary, or proprietor.

A useful service is 'My Credit Alert' ($29.95 GST inclusive)
You should be notified via email (within one working day) of any changes to your credit file, for the next 12 months. Baycorp should also:

Send you an up to date copy of your file via email at the end of the 12 month monitoring period.

Notify you a month prior to the expiry of the monitoring service with an email renewal notice

You can use your Visa, Mastercard, American Express, Bankcard, or Diners Club card to make your request.

NB: You may only request a copy and monitor your own personal credit file. Requests for company and business files can only be accepted from the company director or secretary, or proprietor.

Premium Package ($39.95 GST inclusive)
Your personal, company or business credit file should be faxed or mailed to you within one working day of receiving your request. Baycorp should also:

Notify you via email (within one working day) of any changes to your credit file, for the next 12 months.

Send you an up to date copy of your file via email at the end of the 12 month monitoring period.

Notify you a month prior to the expiry of the monitoring service with an email renewal notice.

You can use your Visa, Mastercard, American Express, Bankcard, or Diners Club card to make your request online.

NB: You may only request a copy and monitor your own personal credit file. Requests for company and business files can only be accepted from the company director or secretary, or proprietor.

http://www.baycorp.com.au/

 

[Mike]

SYDNEY, 23 January 2003:

In response to a rapid rise in identity fraud, leading data-based business information company, Baycorp Advantage has set up a consumer website, www.mycreditfile.com.au to help people understand identity fraud and protect their credit reputation.

Jane Wilson, General Manager, Business Information Services at Baycorp Advantage, said: "Last year identity fraud in Australia cost in excess of $2 billion and it is one of the world’s fastest growing white-collar crimes.

Taking action after a crime has been committed is difficult, costly and often impractical. Personal reputations are often very hard to repair and offenders are frequently impossible to find."

Baycorp Advantage has developed the following checklist, to help people avoid identity fraud, which is on the www.mycreditfile.com.au site:

Do
· Sign all your new credit cards as soon as you receive them.
· Store your cards and personal identification items in a secure place.
· Thoroughly shred any paperwork that contains your personal details or account details before throwing it away.
· Contact your financial institution immediately if your cards are lost or stolen.
· Review your credit file on a regular basis. You should also monitor your credit file so that you receive email notification whenever a new application is made using your identity details. This way you will be able to see if anyone has applied for credit using your name.

Don't
· Write your PIN (Personal Identification Number) on the back of your card.
· Unnecessarily disclose your personal identification information to anyone; even those you think you know well.

US studies show about 10% of identity fraud victims know the offender.

Ms Wilson advises that if you are a victim of identity fraud, you should:

· Contact the police to report the crime.
· Contact the credit providers and inform them of the fraudulent activity.
· Keep notes of all the conversations you have, including names, contact numbers and the dates you spoke.
· Ask questions to ensure you understand the process as each credit provider may have their own processes for handling fraud.
· Obtain a copy of your credit file to identify other instances of credit fraud.

Ms Wilson explained that the usual way in which identity theft occurs is when the thief obtains someone’s identity details through lost or stolen wallets, credit cards, drivers’ licences or stolen mail, and uses these to obtain a false identity and then secure credit for themselves. "This leaves the victim with the potential liability for the debt and difficulties in obtaining future credit."

Baycorp Advantage has also developed a service, My Credit Alert, which allows people to continually monitor and protect their credit reputation and find out if anyone has applied for credit in their name.

For more information, or to order a copy of your Credit File, or register for the monitoring service, visit: www.mycreditfile.com.au

[Source: http://www.baycorp.com.au/ ]

 

[geoffw]

Mike-

Identity theft is not at all uncommon down under- and a problem to those who are victim to it.

In the worst case, a person could get charged under somebody else's name, and the victim could have that charge permanently recorded.

It is a problem police have long been aware of- but perhaps made a lot worse now that so much more background checking is being done.

 

[Mike]

Thanks, Geoff.

I wasn't aware of the problem till now which is why I am alerting everyone. As many of us have a great deal of borrowings it would be a bad mistake to not take this issue seriously and so I suggest we monitor our credit history regularly. I think I'll sign up for the premium package as it is a small price to pay for some important info.

Regards, Mike

 

[geoffw]

No worries Mike. I'm sure not many people are aware of the problem.

Anybody who has ever had an identity document (or two or three) stolen should be especially aware.

 

[Jas]

I was a victim of idenity fraud. I had moved house and asked my old neighbour to forward my mail.

someone got hold of my name and old address. They rang up all those 'order now, pay later' services and got heaps fo stuff - book clubs, cds, staute things, etc.

They collected the boxes as they got delievered to my old front door.

The bills however, came in the mail. My nieghbour then forwarded them onto me.

I got to call the company and explain what was going on. I asked to be put on their black ball list (I'm not ever going to be inertested in buying from them).

I called the police on it. but it when on for months. The person must have gotten thousands of dollars of stuff.

The companies I called didn't belive me at first. They thought I had come up with a clever way of not paying, and wanted me to return the stuff... I just directed them to the police officer I had spoken with. Only one company was actaully interested in taking it any further (the one with the most expesnive items).

It all stopped after a while, so the person either gave up, or was caught.

Jas