Investment Property Advice
Mistake #1: Jumping right in without enough of the right information
Fortunately for you, you are streets ahead of most other people here, due to the fact that you’re reading this book! It’s only a start, but information like this can literally save you millions of dollars over the next few years of your life. Information is that important.
We live in the ‘information age’, yet I’m constantly appalled at the lack of information gathering that the average property investor does before they spend hundreds of thousands, if not millions of dollars on a property.
Going off half-cocked and assuming you know everything you need to know is always a recipe for disaster.
Remember, I’ve been doing this for over 26 years now, so I’ve seen them come and I’ve seen them go.
But information products like this one are absolutely invaluable.
As I said though, it’s only a start. One common factor to all successful property investors is that they seek expert advice, early, and they pay for it. The modest fee for good advice is always far, far less than the price you’ll pay if you make a mistake with hundreds of thousands of dollars of somebody else’s money.
No man (or woman) is an island. Arnold Palmer, aged in his seventies, still hires a coach to help him with his golf swing, even after all these decades at the top of the game. There’s the ‘school of hard knocks’, and the school of ‘prior learning’. So, the ‘trial and error’ methods that used to be our only options are no longer needed.
Mistake #2: Falling in love with a property
It happens to the best of us, by the time we get to the front door, we’ve already decided to make an offer. There would just about have to be an ancient burial ground in the back yard to stop us. The gardens are beautiful, the house is clean, fresh and inviting, it’s got some really great bells and whistles, it has that vague indefinable something about it that you can’t quite put your finger on, but it’s there just the same.
You can easily imagine a great life there, even though you’re looking for an investment property. Even though it’s a fair drive to the nearest schools and the local shop is a little overpriced deli that may not last another year in business. Even though those fancy gardens are going to need tending to at least every weekend, and a heck of a lot of water.
But those downsides are drowned out by the handful of features you just love – the sunken lounge, the bar, the new dishwasher, the lush grass and English gardens. Make no mistake – these things can certainly get you higher rents, and make for higher house values, but you must make sure they aren’t outweighed by other negative factors.
Psychologists tell us that we buy on emotion – then justify with logic. What logic is there to a convertible car with a top speed of nearly 300 km/h? It’s all emotion, people fall in love with them, and they’ll stretch the budget to pay more than they should. It’s only later on that we start thinking about the resale value, the high quality of manufacture, the extra safety mechanisms.
Property investing is no different. Do NOT let your feelings for a particular property affect your mathematics in any way. Crunch your numbers, see if the figures work out, weigh up factors like location and maintenance, get a second opinion from someone qualified, and then, if everything works out to you making money, not losing money, move ahead. Due diligence is just about the most boring task in the world – and it’s meant to be that way, to take the emotion out of it. This helps with
Mistake #3: Not using the Renovation Rule©
The Renovation Rule© states that:
? It will take 3 times as much money and twice as long to get your investment property ready for rental.
With this Renovation Rule©, you can adequately prepare yourself for any unexpected expenses. And while you no doubt plan for the best, it’s always good practice to prepare for the worst. It’s not being negative, it’s just in case.
So, let’s do an example. Let’s say you have a nice apartment in the city, lovely views, great facilities, filthy carpets and a tacky old kitchen. You are planning on spending $ 5000 on new carpets and $ 30,000 on a new kitchen. You get the keys and start paying the mortgage and give yourself 4 weeks to have new tenants in.
That’s your base, and that’s the actual, inflexible, final plan to most people. But most people don’t know the Renovation Rule©, which changes your budget to allow for $ 15,000 for new carpets, and $ 90,000 for the new kitchen. You’ll also now be allowing for an 8 week period with no tenants. This means you’re losing money every week.
Big caveat: let me assure you, this does NOT mean that you go out and spend $ 105,000 on the carpeting and the kitchen; this isn’t designed to get you back down to the bank to borrow more money. This tool is designed to build in safe margins, and in the end, help you buy the property that you will be able to successfully turn into a profitable rental property, not something that will drive you to the very brink of your financial resources, (and beyond). Here’s an example of what I mean:
Let’s say you have a budget of $ 500,000 to buy your property, and you decide that all factors are good on the apartment at $ 400,000, the one that needs the carpet and the kitchen done. You’d think that $ 100,000 would easily cover that, and you’d be right most of the time, but what if? With the Renovation Rule©, it’s right on the edge of tipping over into a no-deal. You may decide to go ahead and run a very slight risk, but in most cases you’ll be fine.
But what if you can’t get the apartment for less than $ 475,000? Most people would think ‘Well, that’s well inside our budget, we’ve got $ 25,000 left over, we’ll get cheap carpet, and we’ll spend the rest on the kitchen. ‘Firstly, this means accepting whatever you can get for the money you have left. You might be very dismayed at the kitchen you end us settling for because of financial constraints, and it could even lower the rents you can ask for.
Plus the other big factor – what about the time between when you start paying the mortgage, and the time your new tenants start paying rent? Even with today’s market where you can tenants in no time flat, your renovations will take time to complete. You have to budget for this. (And I’ve assumed in this example that all your costs come under that $ 475,000 figure.) In this case, if the seller remains stubborn, you may have to keep looking. This keeps you from…
Mistake #4: Paying too much for a property
This is what happens when you make the 2 previous mistakes – falling in love with a property, and then not allowing enough cash to spare after the sale. If you are embarrassed to make a relatively low offer to a seller, you have to get over this if you want to get the best deals.
Here’s the thing: you do not know the seller’s situation. The seller’s reason for selling does not affect your reasons for buying, unless the museum next door has been turned into a nightclub. Oh, they may give you reasons for selling, they’re moving to a warmer climate, closer to family, they want a smaller place, a bigger place, and they probably aren’t lying.
But you often won’t get the real reasons, and it really does not matter. So you have nothing to fear, no guilt to assume, if you make what you think is a ‘lowball’ offer, and they accept it right away. It’s got a lot to do with your ‘millionaire mindset’, as I went through earlier. Chances are they’re happy with your offer, but your mind insists on putting out feelings of guilt, you almost feel as though you’re ripping them off in some way.
Then you have the folks who list their property high to ‘shake the tree’, and see what falls out. It’s certainly a strategy you can use when you’re selling, so be aware of it as an investor. Do your homework; make an offer somewhat below what you expect them to be ok with. If they say no to your first offer, this means they value the property, and you can always make another offer.
Mistake #5: Falling for dodgy property investment schemes
There are so many stories of people falling for various scams. And there are several factors making it more and more difficult to pick the cowboys from the honest experts, such as the media seeming to go after their targets with a ‘guilty until proven innocent’ attitude.
Now, if you’ve been trapped by one of these guys before, it’s not the end of the world. And it’s certainly not your fault, they always seem to appear so professional and their sales pitch is so enticing, and our government, despite their best efforts, hasn’t been able to so as much as we’d like them to.
There is also the fact that there are many genuinely honest experts out there as well, so how do you separate fact from fiction?
1. http://www.scamwatch.gov.au – This is a government website where you can check up on the latest scams reported, information on how they operate, and precautions to take. It talks about strategies scammers have used in the past, such as promising very high returns with no risk, cold call telemarketing, ‘guaranteed rental income’, a hard sell to buy ‘off the plan’, and even flying you to the property, where you’ll be pressured to doing the deal without getting independent advice. Take a look around this website, but be warned: The site talks about several legitimate business strategies, such as free introductory seminars, motivational speakers selling books the government apparently considers ‘overpriced’, and they put a spin on these things as if everyone using free seminars is a scammer. You’re a smart, mature adult – you can make your own decisions without the alarmist attitude of this site.
2. Get independent professional advice – there are several factors to help
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