The 7 Most Common Mistakes Investors Make When Investing in Property
Investing in real estate can be a wise financial move. But to win at the property game and reap the maximum possible financial rewards from your venture, make sure you avoid these seven common mistakes.
Property prices in Australia have skyrocketed in the past 15 years, especially in the urban and suburban areas. In Melbourne, the median house sale price has passed the $1 million mark, climbing up by $300K in the last five years alone. Experts predict that real estate prices will continue to grow in the near future.
This real estate market trend drives many Australians to consider investing in property. Some acquire investment property with the view of selling it at some time down the road when property values are even higher. Others hope that rental property will become a stable source of passive income.
Finally, the solidity of a physical asset appeals to many during a time of global economic turmoil.
While real estate investing has tremendous potential, many Australians make property investment mistakes. For example, buying the wrong property or miscalculating repair and maintenance costs. House of Wealth’s team of property tax experts, based in Mulgrave, Melbourne have made a shortlist of the most seven common pitfalls new investors should avoid.
#1 – Not using the right ownership structure for your property investment objectives
If you take just one thing away from this piece, it would be to make sure you get your ownership structure right BEFORE you buy. Yet, a surprisingly large number of investors, including many experts, overlook this until it’s too late.
The ownership structure with which you choose to hold your property will impact how much tax you pay on rental income and land tax in years to come. It will also determine how much you pay in administrative fees.
Sadly, many investors manage to get everything else right in their property transactions, only to surrender substantial portions of profits in avoidable taxes or expenses.
The most common investment structures in Australia are:
• Individual
• Partnership
• Company
• Trust
• Self Managed Super Fund (SMSF)
Choosing the best ownership structure for your particular investment purposes is a complex subject, and several books have been written about it. There’s no single right answer that applies to everyone. It will depend on your personal circumstances and objectives.
Suffice it to say that you should seek expert advice from a tax professional who’s experienced in property investment matters before you buy.
If it turns out you should be using a Self Managed Super Fund and/or a trust, you will need to make sure you have the necessary arrangements in place before you buy.
#2 – Not doing research on your investment property and its area
The location of your investment property will have a huge impact on the profit you can expect to make. For instance, it would be hard to get quality tenants in a run-down neighbourhood that lacks easy access to transit, shops, and schools.
To make sure that you buy the right place, get to know the area well. Drive and walk around, speak to real estate agents, and seek out genuine input from locals who have lived there for some time. Ask yourself:
• What sort of people would like to live here? What kind of tenant or buyer do I hope to attract?
• What are the selling points of the neighbourhood? Is it quiet and pleasant? Does it have a good reputation?
• Does the area have quality schools, parks, commercial centres, and other attractions?
Be especially wary of areas with plunging prices and falling demand. A neighbourhood with rock-bottom prices usually isn’t the best location for investing in property. You might buy a place cheaply, but you’d end up with a low property value.
#3 – Buying a property without any financing set up in advance
Property investors who have a large deposit saved up in advance will have a wider choice of investment properties—plus lower mortgage interest rates—than will someone borrowing money.
If your property deposit equals less than 20% of the asset price, mortgage brokers will probably offer you a plan that includes the lender’s mortgage insurance. This insurance is a non-refundable fee that protects the lender when people who borrow money default on a loan.
#4 – Not getting enough information about the property before buying it
When you invest in property, you want to learn as much as you can about it, especially with major issues that could cost you a lot of money down the road. A dishonest property owner can try to hide structural issues, plumbing problems, or mould by doing a cosmetic overhaul before putting their building on the market.
A property investor should keep their eyes open and ask the right questions, such as:
• How old is the house, commercial space, or apartment?
• How old are the roof, septic system, plumbing, and HVAC systems?
• What repairs has the building had in the last five years?
Obtaining a professional building inspection report is very wise before buying a property. Many people include a home inspection contingency in the contract when they make an offer.
We also recommend hiring a certified property valuer before you sign a deal. A valuer will give you a realistic estimate of how much the house or building is worth.
#5 – Failing to look at all aspects of the property before making an offer, including zoning and restrictions
Make sure you research all financial aspects of your real estate investment. For example, you may buy a house hoping to earn rental income from a unit you plan to add, only to find out later that local zoning laws restrict any add-on building.
Answers to the following questions will impact your future capital gain:
• Will you need to pay capital gains tax? Can you expect any tax deductions?
• Have you budgeted for entry and exit costs, legal fees, and stamp duty? What about projected advertising costs if you decide to sell one property and buy another in the future?
• Have you figured out exactly what you would pay in property expenses, land taxes, and landlord insurance? Are any of these expenses tax deductible?
Also, keep in mind that property management fees will eat away part of your rental income if you need to hire a property management company. Research before you buy about how much local property managers charge.
#6 – Neglecting to take into account future changes, such as new developments or road expansions that could impact your purchase
Imagine purchasing an investment property with a gorgeous open view on the edge of a quiet neighbourhood. Then, a year later, property developers erect a row of high-rise buildings that block most of the light and airflow to nearby houses, including yours.
To avoid such an aggravating scenario, do your best to research any present and future building projects around your investment property.
#7 – Making decisions on property investing based solely on emotions rather than logic and reason
During a first realty investment, it’s easy to let your emotions, likes, and dislikes sway you. To keep a cool head when investing in real estate, remind yourself that you aren’t choosing a home for yourself and your family.
Your investment should offset costs and add to your capital growth, along with your other investments like stock market shares.
Avoid These Mistakes. Consult the Melbourne Property Tax Accounting Experts at House of Wealth
At House of Wealth, our Australian property tax experts and financial planners can help you benefit from a property portfolio as part of an investment strategy to lead you to financial freedom. We offer personal financial advice based on your investment goals and cash flow. Contact us to learn about maximising wealth while minimising related taxes.
Are you ready to achieve your financial goals? Please call us on +61 (0)3 9999 7703 in Mulgrave, Melbourne, to book your free 30-minute consult now.
This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.