When you set out to create a retirement fund with residential real estate as your chosen investment vehicle, depending on the road you take the journey can be one of smooth sailing, sunshine and lollipops, or downright rocky and hazardous.
The beginning will have a significant bearing on where you end up with your property portfolio and in what state you arrive; hopefully unscathed rather than battered and bruised.
So to help you get to where you intend to be financially in ten, twenty and thirty years time, here are the five things you DON’T want to do when starting out as a property investor…
1. Jumping in without the right knowledge
It’s incredible how many would-be investors get bitten by the property bug and all of a sudden want everyone’s opinion on the housing market and the best possible location in which to make your millions…fast!
And there’s no shortage of willing opinion-givers either. Everyone has a story about ‘this guy’ they know who bought an apartment for $X, did a few cheap renos and then turned it ‘round for a massive profit. Or the ‘newest investment hotspot you just have to get in on!’
Investing in property isn’t a cheap proposition, nor does it come without any associated risk. On the contrary, it takes a lot of money and as with any asset, things can go awry.
As such, you should rely on your own research and if in doubt, consult an industry professional who understands the market and how to invest in it successfully for long term gains. Not your Uncle Bob!
2. Trusting an ‘expert’ without doing your homework
So you’ve realised Uncle Bob’s investment advice is next to useless – given he’s perpetually broke and asking to borrow money off you – and decided to consult an actual ‘expert’.
Where do you start? The cyclical nature of real estate makes it a very fickle beast. It’s feast or famine and when things are going well, everyone wants to hang a shingle and profess to a resounding knowledge of all things bricks and mortar.
But the problem is…whom do you trust? It’s the perpetual homebuyer and property investor conundrum, because this is an industry renowned for some ‘bad apples’.
You can generally pick the good advice from the self-serving by whether it seems to align with your own personal property investment strategy and objectives.
If a ‘financial adviser’ is trying to tell you that a lifestyle property on the far north coast would be ‘perfect’ for your portfolio, whilst flashing glitzy marketing material around, but every other asset you own is within 10 kilometres of a major city, well…you can join the dots.
Qualify anyone you speak with to get a better idea as to what experience and understanding they have of property investment and finance specifically, and whether they receive any commissions for referrals and from whom. You need to work out where you stand.
3. Incorrect structuring
Successful investors are the ones who focus on things like ownership structures to optimise their net wealth position, without diving headlong into a property investment.
Then there are the other 90 odd percent who try hard, but just don’t ever seem to get the numbers right in order to create a self sustaining, long-term portfolio.
Generally they either ‘fall’ into investment by accident – think meeting the love of your life when both of you already own a home – or just jump in without any understanding of how, why, where and when to buy.
It’s called a strategy and every investor needs one to succeed! Based on your strategy, you’ll work out things like what type of properties you should acquire, where they should be located and how you’ll finance them.
I say ‘properties’, plural, because your strategy needs to include significant forward planning. And of course that includes what type of ownership structures you’ll purchase each property in to optimise things like negative gearing and cashflow benefits.
4. Incorrect financing
Walking blindly into different loan structures means you’re likely to get tangled in a mess of different lenders and loan products that will hinder the timely growth of your portfolio.
A good mortgage broker who is well versed in the intricacies of forming and nurturing an optimal debt portfolio that helps to grow your asset base instead of obstructing it, will ask you a lot of questions. Not just about the property you intend to finance today, but the many more you hope to buy tomorrow.
They’ll take the time to get to know what your journey looks like now and how you want it to be in the future and help you avoid things like cross securitization.
Finance can be a property investor’s victory or your undoing, so if ever in doubt, seek guidance when it comes to the best possible lenders and loan products for your needs.
5. Doing nothing
Some wannabe property investors tick all the right boxes with regard to research, homework and preparation.
They seek out multiple experts on all things residential real estate, devour investment books and publications and almost become experts in their own right by the end of all that education.
But they never quite make it up the property ladder.
That’s because they’ve educated themselves into a state of fear. There seems to be a tipping point with human beings where we suddenly know too much about something and then decide we don’t want to think about it ever again.
For whatever reason, it becomes too confronting. Perhaps you feel like you waited too long, you’ll never have the necessary time to build a sustainable investment portfolio with property, or maybe you got caught up in media headlines about ‘bubbles’ (intended reference).
While I’m not suggesting you don’t do any research at all, it’s important to not weigh yourself down with too much information that stops you from taking that first step.
After all, it’s the first step that sets out the journey before you.