Some of the richest people in Australia have built their wealth on the bedrock of property investment, but many Australians still seem content with simply owning their family home. The reason for this is simple, and easy to overcome.
Blogger: Daniel McQuillan, executive director, Investwise
You would think that property investment would be a common form of investment, especially for ordinary people wanting to create wealth for their retirement.
While many in Australia own their own homes, the reality is that very few go on to buying investment properties – even though their own property is generally the biggest financial asset they own.
So why do so few people in Australia own investment properties?
The answer is quite simple – fear.
Fear is a natural instinct, but unfounded fear is something that should not prevent us from improving our lives.
The fear of making a mistake prevents most people from ever buying an investment property, and that is why so many people miss out on their proven form of wealth creation.
While there are many pitfalls in property investment, through education and getting the correct advice, these can be identified and avoided.
Astute property investment is all about educating yourself and making informed decisions.
I have listed below some of the most common mistakes made by first-time property investors to give people an initial understanding that if you have the correct information, then there is no reason to be afraid of investing in property.
Avoiding these simple mistakes means first-time investors can build a successful property portfolio and thereby create long-term personal wealth.
Below are 10 of the most common mistakes made by first-time investors:
1. Buying an investment property they would like to live in without thoroughly looking at capital growth and rental return potential. Most real estate institutes throughout Australia (i.e. REIWA in Western Australia) provide free online information on their websites about the long-term performance of individual suburbs in terms of capital growth, which is a good resource for first-time investors.
2. Deciding to buy an investment property close to their owner-occupier home rather than looking at investment opportunities throughout Australia.
3. Selecting a property based on advice of friends or family rather than seeking independent information.
4. Failing to obtain a tax depreciation schedule for the property. The tax benefits derived by a depreciation schedule can be as high as 60 per cent of the rental income and this additional cash flow can assist the investor to purchase additional properties.
5. Not undertaking a full assessment of the true cost of buying and holding the property. For example, if the property is an apartment, there are additional cost issues compared to buying a stand-alone house, such as strata fees.
6. Selecting the wrong home loan, i.e. principal and interest, which is typical for an owner-occupier home. Instead, first-time investors should focus on interest-only loans, which will help increase cash flow.
7. Buying a property in a location that is not attractive to tenants, i.e. not close to amenities such as shops or transport.
8. Purchasing a property in an area where there is an oversupply of properties meaning rents will be low and capital growth rates limited.
9. Trying to select the tenant themselves rather than using the services of a number of reliable property management companies.
10. Buying an investment property with the view to a quick return rather than viewing it as a long-term investment and stepping ladder to purchasing a portfolio of properties that will create long-term wealth.