Property investment may be simple, but it is by no means easy. While this type of investment has both long and short term advantages, it can be challenging if you are an amateur investor. Here is a list of common mistakes that new and less experienced investors often make – be aware of these, avoid them and you will be on right track!
I’m going to buy property and become a millionaire!
All investors want to buy and sell at the right time to gain maximum profits. However, the desire for quick profits may blind new investors to the hard work that is needed to be successful. As Warren Buffet wisely said, “Wealth is the transfer of money from the impatient to the patient.” Successful investment is about patience and timing.
I will know the right investment when I see it!
Approaching property investment without a well thought out strategy that fits in with your wealth creation goals and personal financial situation is simply foolish. Many new investors simply buy their investment property close to where they live, or where they holiday or where they want to retire. Amateur investors tend to make emotional purchases, that means they buy a property because it looks nice or brings back memories of a family home. Needless to say, the due diligence that goes into purchasing an investment property must be a lot more rigorous. As an investor you should choose a property because it fits your investment strategy and goals; the numbers work and it has potential.
I “heard” that this is the best area to buy in!
Some amateur investors buy property based on “rumours” or “hearsay” that an area will improve, so they hope that they can buy cheaply in that area and make easy money. But the truth is, potentially lucrative areas are not identified via “hearsay” – you need to take a good look at existing infrastructure and plans for development before making your decision about investing in any particular area.
I don’t need to know about risks…only about rewards!
If things are going well you may be tempted to have a few investment deals on the go at the same time. But remember that having three or four deals going through at the same time means that you are incurring additional risk – and if anything goes wrong you may end up losing a substantial amount of money. Do remember that wise investors don’t only buy property; they buy time by having financial buffers in place to not only cover their negative gearing, but to also see them through the difficult times.
I haven’t thought about cash flow, does it matter?
Cash flow is extremely important when considering investing in property. In order to figure out if a deal is good you need to know that you will benefit from positive cash flow. Therefore you will need to have access to extensive market research so that you are able to base your investments decisions on sound facts and figures.
I’m “buying off plan”, it’s cheaper!
“Buying off plan” is often referred to as “buying a hole in the ground” because it is based on speculation. It usually involves buying from a developer who finances his development project partly from buyers and partly from banks to be able to complete next stage. The problem with this is if you buy early (when the property is usually cheaper) but then demand for the properties in the development stop, the banks will not be willing to lend anymore, which means that the project could come to a halt – and for early investors, this could mean a huge potential loss. In the end it may be cheaper, but not necessarily the best move.
I’m investing most of my cash savings!
This may not necessarily be a wise idea. This is about ‘leverage’, a term which means the ratio of mortgage value of the property (or portfolio of properties) to the current market value of that property (or portfolio of properties). For example if you buy a house worth BND 100,000 and put a deposit of BND 20,000, the leverage would be 80%. The higher leverage the better, as it means that less of your own money is used to purchase the property, therefore your ROI (Return On Investment) is higher as well.
I already have all the best investments!
Don’t fall into the trap of not regularly reviewing your property portfolio. Consider the following -: 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.