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 in their journey toward successful property investment and equity prices.
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. When considering property investment, 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 a 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 purchasers might learn the tough way that unplanned expenses reduce returns and ruin budgeted cash flows. For instance, a real estate agent may provide a property investment return that is much higher than what it actually is, as property agents may not include 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 the 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 investment. Quiz the property agent about calculations, and then have them reviewed by a property mentor. Understanding the numbers can help better measure and predict future cash flows, which is of vital importance if a debt purchase is involved.
Beware that excitable purchasers may pay more and make more mistakes. Emotional purchasers investing in property investment use their heart and not their head; they tend to pay more as they may focus on lifestyle benefits rather than viewing the property from an investment perspective.
GST Traps
When engaging in property investment, investors in commercial property 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 as part of a property investment, there are many conditions investors must 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, purchasers must ensure they are able to fund the gap between purchasing the property and receiving the 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 limit. For anyone considering property investment, it is of vital importance to consider the neighbourhood property values as a guide. Besides, make improvements to the property that will add value for the selling price, 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, developers always add a ‘growth premium’ into the final selling prices, which shows that developers believe the property is worth it—a factor often overlooked by most purchasers. For those considering property investment, purchasing in a growth market increases the likelihood of reaching a recognized asset value upon moving in. In the opposite situation, the property may not grow in value or could even decline.
New off-the-plan apartments are like purchasing a new car; when leaving the dealer’s yard, the vehicle’s price drops significantly. Similarly, it is quite tough for new apartments to hold their value after physical completion. Thus, investors in property investment need to carefully consider this point in their buying decisions.
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 guarantees to sell a property investment for more than its real market worth. The trap is that if the property is selling at the market price, there would be no need to guarantee rent. Alternatively, buyers will pay a higher purchase price to justify the guaranteed return. Developers then use the additional capital to pay for the portion of guaranteed rent while profiting from 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 the builder used lower strength concrete, and beams burst under pressure. This incident serves as a cautionary tale for anyone involved in property investment, highlighting the importance of thorough due diligence and structural safety checks.
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.
If you have any queries or want to know more, give us a ring on 0402895593 or email us on pallavi@sfadvisory.com.au.