Article by Mozo
Investing in property seems to be all the rage these days and it’s no surprise when you consider the countless benefits that come with it like capital returns and rental yields.
But just like all things in life, investing in property comes with its downfalls and if you’re not careful you could be lead down the garden path.
So before you try your hand at investing in property, watch out for these common mistakes to avoid:
We’ve all heard the saying “location, location, location”, so it shouldn’t surprise you that picking the wrong location is at the top of our mistakes list. Some of the things to avoid when hunting down an investment property include locations on main roads without infrastructure like transport, shops and parks nearby.
The reason? Well, this type of property without amenities, will not, exactly be an attractive rental to tenants. That’s why it’s always important to draw up a list of things that your ideal investment property should have to ensure you’re not only buying in the right suburb but the ideal spot within that suburb as well.
“Oh what a lovely splash back, and that garden terrace is to die for!” But wait...before you fall in love with a property that you deem as just, “so me”, remove your heart from the buying equation and ask yourself - is it really worth paying a premium for those features if you won’t be living there and will it actually increase the potential for higher rental yields?
You may be better off buying a property that is a bit more rundown but can be spruced up with a bit of DIY reno.
A lot of investors buy with the mindset that their rental income will cover the majority of the investment property related expenses but what happens if you can’t find a tenant for an extended period and your income doesn’t cover the costs?
It’s risky, and if you can’t meet the repayments you could end up defaulting on your loan and the bank could seize your investment property. So only borrow what you can reasonably afford to repay yourself. Use our home loan repayments calculator, to get an idea of an amount that will suit your financial situation.
Speaking of rental income, make sure you keep an eye on the market and make rental increases whenever your tenant’s lease has come to an end (usually 6 or 12 months). Your tenant is likely to take increases to rent of $10 or $15 far better than if you hike up the rent by $50, because you’ve been apathetic and let too much time slip by.
While home loan interest rates are currently at record lows, you never know when the market could shift. So make sure you can reasonably afford your ongoing repayments if your lender was to increase your rate down the track by using our rate change calculator.
Scenario: Ted has a $600,000 investment loan, which he’ll repay over 25 years. When he took out the loan his rate was 4.5%, so his monthly repayments were $3,335. But if his lender lifts his rate to 5%, his ongoing repayments will be hiked up to $3,508 - a considerable difference of $173 a month and $2,076 over a year.
One of the best parts about buying an investment property is negative gearing, which ultimately means if your rent isn’t covering your home loan repayments you can claim a portion of that expense. But the interest on your loan isn’t the only thing you could claim at tax time.
So make sure you have a chat with your accountant to ensure you’re maximising your tax return with the deductions available to you. These include the costs of any repairs to your investment, council rates and strata charges (and much more!).
That’s a wrap up of the common investment mistakes to avoid. The next step? Read up on how to land yourself the best investment deal with our tell all guide.Investing guides