Learning from investment mistakes made by others is the shortcut for most investors. It is a key for knowing experience and lessons that can assist property investors to minimize their investment risks. The following contents will highlight the investment mistakes, which might bring some enlightenment for new property investors.
Finding the real bottom line (ROI Calculation method)
It is important for investor to measure return on investment (ROI) to determine that property’s profitability. It shows how investment dollars are being used to generate profits. ROI should be calculated after all reasonable potential expenses to identify the real bottom line on property investments. However different methods to calculate ROI can make huge difference to estimate returns.
Be cautious purchasing a property because of its deemed ROI
When dealing with real estate selling agents, beware of their explanation of the expected returns, otherwise purchaser might learn the tough way that unplanned expenses reduce returns and ruin budgeted cash flows. For instance, real estate agent provided property investment return maybe much higher than what it actually is as property agents may not include the reasonably foreseeable expenses, such as stamp duty, Loan set-up costs, title registration, letting fees etc. Therefore potential buyers need to be wholly prepared with surrounding facts to make a well informed decision to protect themselves as much as possible. Moreover, potential buyers also need to consider following points:
- Property occupancy rate. When tenants turn over, income will not be earned.
- A new around of advertising and marketing fees when there is a change of tenant.
- Major maintenance or improvements that may occur, such as pipe leak, rewiring, etc.
In addition, property investors should particular pay attention on land tax. Whether this applies will depend on:
- The property’s unimproved land value
- Whether the property is owned via an entity or individually
- Whether the purchaser owns other properties
Know your limits if you lack property knowledge
Investors should ask plenty of questions to those who know more than they do about property. Quiz the property agent about calculations, and then have them reviewed by property mentor. Understanding the numbers, can assists better measure to predicate future cash flows, which is vital importance if debt purchase is involved.
Beware excitable purchaser may pay more and make more mistakes. Emotional purchasers investing use their heart and not their head, they lean to pay more as they may be looking at property more in lifestyle benefits rather than investment perspective.
When investing in commercial property, investors are required to register for GST. When we forget to include GST into budgets, the figures involved can be significant. If this happens, investors have to pay GST on any sale they made since the time they were required to register, even if they didn’t include GST in the sale price.
When purchasing a property, there are lots of conditions that investors are required to meet if they want to claim GST back. Moreover, investors will need to pay the money upfront to the seller creating a potential and immediate cash flow issue. Therefore, purchaser must ensure that they are able to fund the gap between purchasing property and have received GST refund. Thus, always speak to an accountant about GST matters before purchasing and selling a property.
Avoiding overcapitalisation traps and adds value
Location areas normally have a ceiling limited. It is of vital importance to consider the neighbourhood property values as a guide. Beside, make improvement to the property that will add value for selling price as well, which might include: updated lighting and modern fixtures, renovating an old kitchen and bathroom, replacing carpet, etc.
Lessons from off-the-plan purchases gone wrong
As off-the-plan properties are normally sold two to three years before physical completion, developer always add ‘growth premium’ count into final selling prices, which shows that developer believes that property is worth it which is also often overlooked by most of purchasers. While if purchasing in a growth tends market, a purchaser will probably reach recognised asset upon moving in. Although in the opposite situation the property does not grow in value or even declines.
New off-the-plan apartments are like purchasing a new car, when leaving the dealer car yard, the vehicles price drops significantly. As it is quite tough for new apartments to hold their value after their physical completion date. Thus based on this point those investors need to be concerned into buying decision.
Beware of borrowings when purchasing off-the-plan property. The problem is if the bank’s valuation is significantly lower than purchasers agreed price, investors do not have the funds to meet the settlement, as a result they lose their upfront deposit. This could be a potential risk for investors to concern about.
Traps when purchasing a new unit and apartment
Buying a unit in a large complex might likely face several properties with similar conditions on sale and for lease at the same time. This can lead to market supply exceed its demand. If investors want to sell quickly or rent their property, they are willing to accept prices which are below market value.
Aware of rental price guarantee
Developers use rental price guarantee to sell a property for more than what the property real worth is. The trap is if the property is selling at the market price, there would be no need to guarantee rent. Alternatively, buyer will pay a higher purchase price to justify guaranteed return. Developer then use the additional capital to pay for the portion of guaranteed rent while profit form the rest.
Builder use poor quality materials to build property
Most recent case is the Opal Tower in Sydney. Around 300 residents were forced to evacuate as cracking could be heard as well as the physical movements of the building. Many feared the building would collapse. After investigation, it was found that builder use lower strength concrete, beams burst under pressure.
Below are some tips when considering to by an off-the-plan apartment:
- Research the developer’s track record
- Have the building plans reviewed independently
- Check the extent which insurance covers for building defects
- Ask more questions if purchasing because of promised rental returns
- Do your own research and decide what the property is really worth
To sum up, based on previously mentioned contents, investor should pay more attention with their own due diligence. Rely solely on selling agent or developers provided information, may put investors themselves in danger. Moreover, learning from mistakes made from others can help property investors avoid making fault investment decisions and generate experience in real estate investment.