• 5 traps for property investors to avoid

    Investors should pay a bit more and get the ‘right’ investment property. 5 traps for property investors to avoid

  • 1.  Waiting for the “perfect” investment

    I am not sure there are many perfect investment properties that can tick all the boxes!

    Understanding that with all investments there is a level of risk and debt associated, some buyers – and especially first time investors talk themselves out of buying an investment property because they procrastinate and are scared of increasing their debt position.

    However, whilst you will be increasing your debt position, the ‘right’ investment property could mean that you are getting into ‘good debt’ and not into ‘bad debt’ with items that depreciate in value such as new cars, boats, and other household items.

    Investors should definitely do their due diligence before purchasing and consider the pros and cons and seek professional assistance; however one area they should avoid is to over analyse or become emotionally involved when buying an investment property.

    It’s not an emotional decision, but rather a pragmatic one, where the due diligence process confirms the original objective of buying an investment with good proven or illustrative rental returns and capital growth.

    2.  Buying new or off the plan properties.

    Focus on the main game! Many investors forget about the cardinal rule in real estate investing: buying well and buying property at or below what it’s worth.

    Instead, some focus on the attraction of the tax depreciation benefits offered with new developments or the Stamp Duty savings that are available in certain states when buying off the plan.

    This can apply to seasoned investors or the first time landlord, but it’s important to remember you are buying real estate and this is an investment first and foremost.

    Often new properties are priced according to developer’s profit margin percentages and attract GST, which is paid by the developer and generally loaded into the purchase price.

    This means that a property can be inflated or overpriced as it contains these upfront ‘margins’ to the developer and agents and as such, have restricted capital growth as they are competing with newer apartments that are built every year.

    This is particularly true in inner city Apartment developments, however as planning guidelines change, these developments are increasingly moving into the suburbs and the attraction of the Tax Savings or Stamp Duty reductions start to disguise the true value of the property- or Investment!   

    3.  Lenders won’t lend on every property

    It always pays to get your finance sorted up front – and even if you may have had an approval on a previous potential purchase, you should always check that your lender will honour this loan on the new property you have found.

    In short, lenders will not lend on all properties and you need to be aware of this.

    If a lender doesn’t like lending against a certain property, it should send a signal to you and it may have nothing to do with you or your application. The reason may be that they are not willing to risk their money and expose themselves against certain properties such as country/regional/mining town properties or only lend on lower Loan to Value Ratios (LVRs of only 70%) for commercial properties, which they see as harder to tenant or resell.

    The type of properties some lenders typically avoid include high rise apartments in the CBD and surrounds, stratum title or company share properties, leisure time-share resorts, small apartments including studios and student accommodation, defence housing and serviced apartments.

    Each of these property types can represent a level of risk in the lender’s eyes about its future potential value and as such, their ability to recover the loan value. If they have a concern or impose stricter limitations, you really need to reconsider that property and the true investment value.

    4.  Buying an investment property in locations that you are not familiar with

    It’s true that a good investment can exist almost anywhere – but many investors make the mistake of buying properties overseas or interstate without really knowing those markets and doing their due diligence properly.

    Developers are very clever at positioning investments to non-locals, especially in tourist or commercial precincts, combined with cheaper entry level prices. Buyers can easily make the mistake of comparing prices in areas they know for example closer to home, compared to these areas they are visiting and don’t know.

    Our advice is to do your due diligence and study comparable sales in one or a few areas that you are familiar with so that you can purchase the right investment property at the right price

    5.  Getting a foot on the ‘investment property ladder’ for the sake of it is a mistake

    This can be true particularly when the property is cheap and you are lured by a lower price.

    What under-pins a good property investment is a number of common fundamentals that set it apart from poor investment properties. This might sound obvious; however the attraction of a low entry price can mean that a number of common fundamentals are missing!

    In the case of a residential house or apartment, this could mean a quiet but convenient location with facilities for car parking and the overall street appeal and the attraction of a reasonable outlook and orientation to sunlight. You may have seen this for yourself when developers are marketing apartments for sale and the cheaper ones are usually the smallest, lower levels and with few frills. They can sometimes struggle to sell these properties and this should be a good reminder as it applies generally across all aspects of property market.

    Investors should pay a bit more and get the ‘right’ investment property, not the cheapest one. Poor investment properties are likely to be the cheapest ones and be limited in terms of capital growth prospects and future resale prospects because they do not have key attributes such as an outdoor area, the appropriate floor plan or it is on a major highway.

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    Frank Valentic

    About the author

    You have seen Frank bidding at auction on the hit television show, The Block over the last five seasons and have witnessed his competitive instincts and energetic nature first-hand, joining The Block as a regular weekly Buyer’s Advocate judge in 2015.

    Away from the television cameras, Frank is the Director of Advantage Property Consulting and is considered to be one of Australia’s leading Buyer's Agents and Vendor's Advocates. Frank has now teamed up with The Great Australian Dream as the series Buyer’s Advocate to show viewers the many tricks and tactics to purchasing the right property at the right price.

    Frank Valentic

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  • Disclaimer:

    While such material is published with permission, RAMS is not responsible for its accuracy or completeness.  This information is general in nature and has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness of the information to your own circumstances and, if necessary, seek appropriate professional advice.