WHAT MISTAKES TO AVOID WHEN INVESTING IN PROPERTY

 

Investing in Property is no easy task and many property investors make the same mistakes with regards to making a sound and informed investment decision. If you want to be a successful property investor then this article is for you.

 

A number of property investors fail to enjoy a good return on their investment and in some instances lose on their investment due to errors of judgement listed hereunder. In this article, we explore what steps to take to avoid these mistakes.

 

1. Not understanding the risks of property investment

Before embarking on any property investment, have an open mindset. In other words, avoid thinking that investing in property is an easy way of making money.

There are risks entailed with property investment and is based on a successful strategy, your circumstances, identifying the most suitable property, and a bit of luck in finding the property at a good price.

 

Don’t expect that a Property investment will reward you with pots of money quickly. Returns from a property are usually realised over the long term.

 

Understand the effect of interest rate changes on your pocket and the economy. Establishing where the interest rate cycle is, i.e. whether the market is in an interest rate uptrend or down trend, is crucial in safeguarding yourself from overcommitting on a property.

Suppose the interest rate cycle is in an uptrend and expected to continue to increase over the short term. In that case, it is best to factor in a couple of increases in your affordability calculation.

This will safeguard you from a cashflow shortfall when your bond repayments increase as the interest rates increase.

 

2. Buying a property in your own name

Buying a property in your name is most often not a good idea and unfortunately, a mistake that many property owners make.

Apart from your property not being protected from third parties suing you in the event you fall into debt, the banks will become reluctant to approve a bond should you have multiple properties in your own name.

This is due to the amount of debt that you as an individual will have, which the banks will view as high risk.

Therefore, you cannot build a respectable property portfolio in your own name.

 

3. Not conducting in-depth research

Many first-time homeowners don’t conduct enough research on the property they are wanting to buy.

Information is readily available on various websites such as TPN or Lightstone Property. Using these websites, you can purchase various property reports for specific regions or suburbs. They provide invaluable information both current and historical that is needed to make an informed decision when buying a property.

 

4. Rushing to buy a property

Never rush to buy a property because you fear that if you don’t submit an offer quickly, that someone will and you then “lose the house”.

Obviously, a well-valued property will be sold relatively quickly but you should never buy a property before you conduct your research on the Property.

 

 5. Paying too much for a property

Many buyers become emotionally attached when seeing a property they love and their emotion then controls the desire to obtain the property no matter what the cost.

 

Paying too much for a property drastically reduces equity and leverage with the banks to obtain financing over and above the purchase price.

 

Paying too much for a property will also affect the eventual profit you will make when you sell the house down the line.

 

6. Not accounting for increased costs

Buying property comes with additional costs such as rates, insurance, repairs & maintenance to name a few.

These costs will increase every year so you must take these costs into account when calculating your affordability.

This element is most often overlooked by people wanting to invest in property. This element could have a significant impact on your finances, which may influence your ability to ultimately hold onto your investment property.

 

7. Not taking out a loan for the market value

Similar to paying too much for a property, you must obtain a loan for the market value of the house as this will allow you to draw further capital in the future.

This scenario is particularly relevant when you buy a property for less than the market value and therefore the difference between the market value and the purchase price will represent further equity.

 

8. Not having enough reserve funds for repairs

Over and above the funds you will need to buy a property to cover transfer and bond costs, you will need to build up a reserve fund to cover expenses relating to repairs and maintenance that you will at some point have to carry out for your property.

You may not necessarily need these excess funds initially especially if you have bought a new or recently renovated property, you will need to have a cash reserve in case of an emergency.

 

9. Not understanding the term ‘location, location, location’

Most property investors are familiar with the saying ‘location, location, location’ which is arguably the most important factor to consider when buying a property.

But it is important to understand what is meant by location.

 

Location doesn’t necessarily mean buying a property along the coast or in an exclusive area. It means buying a property where there is high demand for the property type that you may be looking at. High demand factors include:

1) proximity to schools and shops,

2) security,

3) proximity to highways.

 

10. Not educating yourself

Read and always be informed about property investment.

Speak to a mentor, colleague, or friend who has experience in property investment. Someone that has grown a property portfolio over time and experienced the ups and downs of property investment.

 

11. Not conducting thorough property inspections

Ensure to include a clause in the offer of purchase that allows you the opportunity to conduct a thorough property inspection following the initial viewing.

This will enable you to pick up any issues relating to electrical and/or plumbing that you may have reasonably missed or were unable to test at the time of viewing.

Not conducting a thorough property inspection may be very costly.

 

12. Settling your bond too early

While paying extra into your bond ultimately reduces your interest and your loan term, it is not necessarily a good idea if you are renting your property.

If you are enjoying a cashflow profit on your property every month after having paid your home loan, it would be preferable that any excess funds be utilised to either build a reserve fund and/or use it to purchase another investment property.

 

13. Underestimating the time factor of having an investment property

Many property investors believe that they can just invest in a property, rent it out, and then sit back and watch the rands accumulate.

This is just not the case. Buying a property involves work in managing the investment. You need to keep your eye on the ball and regularly check that your tenant is not abusing the property.

You need to treat your property portfolio like a business.

 

14. Not using professionals in managing the property

It is advisable to use a professional property manager in managing your property in the event you rent out your property or properties.

They will ensure that your tenant receives their rental invoices timeously and maintains the property in terms of the lease.

 

If you as a Property investor avoid making the aforementioned errors, you will likely enjoy a very successful property investment journey.