15 Jul 7 Things Smart Property Investors Do When Choosing a Property Investment
Property investment can be an excellent way to build wealth and reduce the amount of tax you pay at the same time. Yet there are plenty of investors out there telling horror stories about buying a lemon, or losing money on a deal, or leasing to the tenants from hell.
What you may not realize is that there are some ways you can avoid the majority of these problems.
Here are some things smart property investors do when choose the right property investment strategy to suit their goals:
1. Leave Emotions Aside
It’s surprising how many property investors make their decisions based on emotion. They can picture themselves living in the home, or they spend too much money on fancy renovations.
In reality, an investment property should be little more than a business decision. Do the numbers stack up? Is the rental return what you’re expecting for your individual investing strategy? Does the property complement your portfolio and lead to future wealth creation as you expected?
A good investment is all about how the numbers work for your investing goals. Leave your emotions out of it and think of it like a business decision.
2. Avoid Trends and Fads
Property investment fads come and go. Sub-dividing, developing, granny flats, renovations, buying in the USA, flipping (buying and selling for a profit) are all common fads that attract a lot of newer investors. Unfortunately, by the time you read about them in an investing magazine or see them on TV, they’re already coming to the end of their cycle.
The only people who really make money on those types of fads is those who get into the cycle early. By the time the average ‘mom-and-pop’ investor jumps onto the bandwagon, the fad is already declining.
Don’t invest in fads and trends. Work on a sound investing strategy that works for your individual goals.
3. Choose Advice Wisely
How many times have you been given property investment advice from a well-meaning family member or friend or colleague? Yet when you look more closely, you might realize that the person giving the advice doesn’t invest for a living or hasn’t made much money from their investments at all.
4. Don’t Get Burned by ‘Hot Spots’
Did you know by the time you read about a property ‘hot spot’ in a magazine or newspaper, the growth cycle is already at – or near – its peak.
Areas where property prices are going up sharply are usually touted as being ‘hot spots’, simply because there’s a rapid price spike showing from recent sales. That spike might have been caused by new infrastructure or new industry in the area, but it won’t last forever. By the time you see it reported somewhere, the spike has already happened and the boom has already ended.
Invest in areas where rental demand is high and there is good infrastructure in place.
5. Bigger Isn’t Necessarily Better
Many investors believe that a large family house on a big block of land will be the best investment property for them. They have images in their mind of a young family moving in with three kids and a dog, so they aim at larger properties. In reality, large 4-bedroom homes only suit a small portion of potential tenants.
However, research shows that the most highly sought-after type of property in the Adelaide rental market is a three-bedroom, two-bathroom home. An average sized home suits young professional couples. It suits young families and even single-parent families. It suits the downsizers who don’t need a large home any longer when their kids grow up and move away.
Choose an average sized home in a location where there’s plenty of demand from tenants in an area with good infrastructure in place. You’ll reduce your vacancy rates and ensure there’s always demand for your property from someone.
6. Create the Right A-Team
You’re not expected to be a property expert in order to be a successful property investor. In fact, if you have the right team of people around you, it’s possible to let them handle all the ‘expert’ stuff.
For example, you can avoid the majority of tenant nightmares by choosing a professional property manager to look after the rental side of things. Choose a good accountant who understands your goals and your individual financial situation. Discuss your finances regularly with a specialist investment financier to be sure you’re making the most of your finance structures. Ask questions from your financial planner or financial adviser to be sure you’re properly protecting the wealth you’re creating.
When you have the right team of people around you, your investing strategy becomes easier to manage.
7. It’s Not A ‘Get-Rich-Quick’ Plan
Property investment is not a plan to ‘get-rich-quick’. In fact, statistics show that it’s time IN the market that counts. Smart property investment is about planning for the long term. Over time, the value of your property should rise. The amount of rent you charge your tenants should also naturally increase over time as market demand changes.
Yet by trying to buy into the market while prices are rising and then selling out again just to realize a quick profit, you’re potentially missing out on some significant gains. Buying and selling property is expensive. You have stamp duty and other costs associated with buying property to think about. You also have to consider agent’s selling fees and any potential Capital Gains Tax you might have to pay when you sell.
If it looks like the market is going flat and you’re tempted to sell your investment property, take some time to work out the sums. You might find it’s better for your overall strategy to ride out the flat periods in the cycle and hang on for the long term instead.