Every day there are thousands of hopeful aspiring new investors coming into the market wanting to build wealth for their families. At the same time there are also thousands of people exiting the field swearing to never go back to property investment. When I ask the latter why it didn’t work out, they often answer something along these lines: the property had problems with it; the tenants were slack and irresponsible; government changed the rules; the market changed; there was a painful divorce and the list goes on and on. They often blame external factors rather than taking responsibility. They believe or maybe even pretend that their thoughts or actions had nothing to do with their downfall or financial losses. 90% of the times it’s the “mum-and-dad” type of the investor that finds themselves in this situation and gets hurt the most. The professional investors always put safety mechanisms in place to protect themselves. Let’s have a look at just 6 mistakes that can severely damage your financial health.
Don’t get complacent after the settlement
Once the new landlord settles the property and gets tenants moved in they tend to just “go with the flow”. If they don’t come across any challenges they don’t want to look at how the performance of the investment can be optimised. One example of that is not restructuring the finance frequently enough.
I meet a lot of prospects that still have mortgages in mid to high 5% interest rate. Why would you make yourself hurt so much if you could go and refinance at low or mid 4%? Let’s say you have a $500,000 mortgage on interest only at 5.3%. Your annual repayments would be $26,500. If you refinance to 4.5% then you are paying $22,500. That is $4000 savings right there. Some people are worried about their break fees, yet they can’t even tell me how much they are. In some cases it might only be a matter of a few hundreds of dollars. Do you also know that the new bank may pay your break fees as well or give you $2000-$3000 cash incentive? At the end of this exercise you are winning by far.
The second aspect that investors do not review often enough is the rent. You should do a review between the tenants and ensure you are charging a fair market rent. If your tenants have been staying for 3-5 years with no change then it is time to do some market research and see if you could increase it a little.
There are several other areas that i review when we work with our clients including taxation, depreciation, current market value, and what other options are available to my clients by way of further investment.
Don’t manage the property yourself
I repeat: do no manage the property yourself. What are you going to do when the tenant calls at midnight asking you to open the door because he locked himself out? How will you react when the tenant calls you crying and saying he lost his job hence he can’t pay the rent? You will probably cry too! Let the professional experienced property manager handle that for you in a timely manner minimising your losses. What about the legalities and making sure you are doing everything right? It is very often that tenants know tenancy agreements better than landlords, so when they slip up it may cost them dearly.
Don’t take shortcuts
I won’t go in too much detail here as this is just basic things that NZ Herald would have been warning the buyers about for the last five years. It is things like: getting the LIM report, doing the builders inspection, doing the drug test, using a good lawyer, doing the title search, talking to a property manager and a local real estate agent, researching the location. Basically, do your homework. Although the list stated above sounds so basic, a lot of people skip the crucial steps. I won’t bore you with the details of carrying our comprehensive due diligence as it can really take a book or two. The point is don’t skip any of those important steps. Remember you are about to make one of the biggest commitments and the biggest accomplishments so yes, take it seriously. The more diligent you are, the higher chance of success you have.
Have a buffer
Instead of using all your deposit or approved mortgage limit towards the property, leave $20,000 for unexpected costs and any unforeseen events. The problem with property is it is not very liquid. Unlike shares you can’t sell it within you lunch break and get some money out.
The buffer might be your cash savings or even an overdraft facility. So when would you need this buffer?
-the interest rates rise by 1-2% hence you have to top up more towards the property
-you have a longer than normal vacancy
-you get sick or lose your job and it may take several weeks or even months to get back on your feet
-repairs that prevent your property from being tenanted
Using up your buffer to get your through hard times is likely to be a much better option then selling your appreciating income producing assets in desperate times. Such buffer would have saved a lot of investors during the GFC. The trick is to have it arranged before you need it.
Know your why … and remember your reasons for doing this especially when the times are rough
Do you invest in property just for the sake of collecting houses? Probably not. I suspect you want to use property as a vehicle to build your nest egg or achieve your major goals like financial freedom, being able to provide university education for your children or help them with their first home. Maybe you want to start your own business?
You need to understand how property will help you to get to your destination. People who create substantial wealth through property understand that the power is in the hold. So, remember why you started and stay the course. Remembering your reasons and your goals will enable you stay strong and brave through the good, the bad and the ugly.
Research the location very well
This is a big one, guys. Poorly chosen location can be a reason for long tenants vacancies, bad quality of tenants and slow value appreciation. This is especially important to remember when you deal with property consultants, advisors and other property investment companies that promise that “Town XYZ is the next best thing since the sliced bread”. There are thousands of investors who have been burnt in the past by investing into cheaper properties in small cities. There are cities in New Zealand that are diminishing in population because of the lack of economic opportunities.
Ideally you want to invest in growing cities that have a strong rental demand. Look at the historical growth as well as what future opportunities are there to guarantee the growth. My favourite cities to invest in are Auckland, Hamilton and Cambridge. They perfectly meet my criteria for investing. One of the best things about these cities is the shortage of rental properties. Remember Economics 101 Supply and Demand Rule.
Although there are more mistakes that investors make I am going to stop here as it is already past 1100 words and apparently people don’t read past 500. If you enjoyed this article let me know in the comments on Facebook and I will write Mistakes V.2.