Strategies to avoid property investment mistakes

The common belief that property investments are the epitome of security—akin to bricks and mortar—may not always ring true, despite rising property prices seemingly reinforcing this perspective. Viewing residential property investment as a foolproof way to accumulate wealth can be misleading, as it can lead aspiring investors into numerous financial pitfalls.

Economists typically attribute the steady ascension of Australian housing prices over the past twenty years to two key factors. Firstly, deregulation in the banking sector has enabled a wider range of banks to lend more extensively, allowing more Australians to purchase properties. Concurrently, record low interest rates have empowered Australians to offer more competitive bids for houses on auction day. However, this seemingly relentless price surge has fostered a misguided conviction among Australians that residential property investments are infallible.

Common Missteps in Property Investment

1. Neglecting the Numbers

A prevalent error among investors is overlooking the importance of comprehensive financial calculations before making an investment. Many operate under the assumption that even if they incur monthly losses, eventual capital gains will compensate for these. But what if this expectation doesn’t materialise? It’s crucial to consider how much financial loss could occur if rental income doesn’t cover property outgoings and calculate the necessary post-tax capital growth required for profitability.

2. Ignoring Expert Advice

Securing reliable advice from the outset is fundamental. If your investment strategy is tax minimisation, it’s essential to consult a tax agent who can guide you through the crucial figures. For instance, purchasing a new house or apartment might allow for non-cash depreciation charges that can considerably enhance your tax deductions and, consequently, the likely success of your investment.

3. Overborrowing

It’s easy to get swept up and borrow more than you can comfortably repay. Initial comfort with a weekly tax loss of, say, $200 may diminish over time, transforming into a burdensome cash shortfall.

4. Misjudging Interest Rates

Decades of record low interest rates have bred an unfounded expectation among Australians that these rates will perpetually remain low. As recent history shows, interest rates can escalate unpredictably depending on the economic climate. Can you accommodate larger repayments if rates ascend?

5. Underestimating the Power of Research

Many prospective property investors falter due to inadequate understanding of the property market or the specific area they’re investing in. This lack of insight could result in overpaying for a property or overcapitalising due to excessive renovations.

Overcapitalisation refers to situations where the cost of improvements (like renovations or landscaping) exceeds the added value to the property. For example, spending $100,000 on renovations only to find it adds just $50,000 to the property’s final sale price.

Unmasking the Reality of Property Investments

According to the Australian Bureau of Statistics, since the 1990s, there have been five periods where house price growth has been negative, with reductions as significant as 10 per cent on average compared to the previous year.

All investments, including property, come with inherent risks, however uncomfortable that truth may be. The most robust safeguard is seeking expert advice before committing to a property purchase and discerning whether the investment truly makes sense after factoring in all expenses and taxes.