Underestimating the financial risks involved in property investment is a sure way to lose a lot of money.
By navigating your first property investment successfully and learning the ropes early, you’ll have gotten past the hardest part. To help you do just that, here are four mistakes that beginner property investors make all too often.
Renovations are a brilliant way to add value to your investment property. However, doing so is not without risks – if you overcapitalise, your renovations could end up costing you more than the amount of any value increases.
When renovating it’s essential that you first consider the buyers and renters who are likely to be interested in your property in future. If you were in a low decile area with lots of families, this might mean that installing another room would add the most value, while installing a wine cellar or a scullery could turn buyers off.
On the other hand, if you’re in an area populated by the wealthy, premium additions are likely to add the most value. Make sure your money’s well spent and always consider the end user before changing your property.
2. POOR CASHFLOW MANAGEMENT
With so many costs to cover, it’s incredibly easy to let your cash flow problems get out of control as a property investor. Unexpected expenses will make keeping your cash flow healthy difficult – these could include:
– Emergency maintenance costs,
– The cost of disputes,
– Insurance premiums and excess, and
– Bank fees.
It’s essential that you always ensure there’s room in your budget for a sudden increase in costs, as well as a small cash reserve in case something expensive comes up out of the blue. That way you can be sure that no matter what occurs, you’ll be well equipped to handle it financially.
3. BEING FEARFUL OF DEBT
In January alone investor loans Australia-wide totalled well over $13billion, according to the Australian Bureau of Statistics. There’s a reason this number is so high – having a high level of debt isn’t necessarily a bad thing – it’s the right kind.
Good debt is easily managed, reduces your tax obligations and makes owning several properties possible. As long as you have the cash flow and the know how having a high level of debt on your investment properties could actually be beneficial.
On the other hand, using spare cash to aggressively pay down your home loan could leave you exposed if extra costs come up.
4. MANAGING YOUR PROPERTY YOURSELF
Cutting costs can be a great way to increase your profit when it comes to investment property. But hiring a property manager is one cost that is absolutely essential, particularly if you’re new to property.
Your property manager will handle all day to day interactions with your tenants, from maintenance requests to inspections and rent collection. They’ll also keep your tenants happy so that they’re less likely to leave, and quickly replace them if they do.
Minimising the risk of vacancies will make your investment a safer, surer one, which is a good thing no matter how you look at it.