Buying a property is a significant financial decision that requires careful planning and research. It’s an investment that requires not just financial but also emotional commitment. For first-home buyers, the process can be overwhelming, especially when they don’t know where to start or the common mistakes they should avoid.
In this article, we have listed the top six biggest mistakes people make when buying a property, and the top tips to avoid them.
Purchasing the wrong asset type
Buyers often choose apartments in their local areas because they cannot afford to buy a house as a family home. However, this can be a trap in which families can get stuck with an underperforming asset. When purchasing apartments, buyers should keep in mind the pitfalls that come with it, such as a land component split between all residents, a reduced selling price due to oversupply, and common structural problems like concrete cancer and waterproofing issues. This can lead to unexpected expenses in the long run. Major capital expenses for facilities in common areas that need to be fixed or improved, such as replacing old lifts, will require strata to collect a special levy. Added to the burden of owning an apartment are the quarterly strata levies which could range from $500 a quarter to more than $1,000 per quarter for average-sized apartments.
Not understanding how finance works
It’s crucial to gain a fundamental understanding of property finance and markets. To get started, read up on books about the property from Australian authors like Margaret Lomas and Noel Whittaker. This can help you understand the basics of how money, leverage, and investing work.
Not doing your due diligence and research
Before buying a property, find out the following:
- Is it a growing suburb?
- What plans are in the works for the area?
- What are the proposed infrastructure projects?
- What amenities such as schools, supermarkets and shopping centres are available?
It’s also essential to know if the property is next to commercial sites, a water treatment facility, in a flood zone or at risk of bushfire. Doing the necessary research can save buyers from purchasing a problematic property.
Choosing an older property that is hard to maintain
Look for a property that is ready to rent out immediately. Properties that are 3 to 5 years old still have high depreciation costs. Higher depreciation means there is more to gear against your income.
Only purchasing in your own backyard
Many buyers tend to only look for properties in their local area, but that may not be the best decision. Buying in an unfamiliar area could mean the biggest capital growth and, in the case of an investment property, long-term rental returns. People should do their research and due diligence, and they could also hire a professional buyer’s agency that focuses on borderless investing.
Not having a six-month buffer or emergency fund.
Investors should not focus solely on buying their next property. They should also take into account unexpected issues such as repairs, vacancies, or rising repayments. Buyers should have an emergency fund that will cater to these issues, and a six-month buffer is ideal and brings extra peace of mind to the property purchasing journey.
Here are our top tips when buying an investment property:
- Failing to Reduce Costs
Because of inflation, the cost of living in Australia has risen over the years, making it harder for people to save for a property. Reducing your living expenses is crucial if you want to purchase a home. Live with your family or in a shared house, and cut down on luxuries to help you save for a deposit.
- Buy an established property instead of buying land and building a house
While new builds might seem attractive, we advise against them. Building delays can cause you to wait for two or more years before you can start generating rental income. Moreover, new builds come with the risk of smaller land components and premium house builds.
Buying an established house means you get started in your investment journey straight away. If you choose right, you get the instant benefit of capital growth and rental income. You can start enjoying the benefits of getting a tax refund at the end of the financial year, which is the whole reason why you are investing in the first place. To understand negative gearing, it is important that you speak to your accountant who can help you do the maths to find out if property investing is right for you.
- Not Paying Yourself First
If you want to save money for a deposit, you need to pay yourself first. Set aside a portion of your paycheck and transfer it to a different account that you won’t touch. Over time, your savings will grow, and you’ll be one step closer to owning a property.
- Overusing Credit Cards
Avoid using credit cards unless it’s absolutely necessary. If you must use one, try to keep the limit as low as possible. High credit card limits could decrease your borrowing power when it comes to buying a property.
- Failing to Refinance
If you already own one or more properties, refinancing could be a wise decision. You can take out equity and park it in an offset account, which can serve as your savings. You can use this equity to purchase your succeeding investment properties.
By avoiding the 6 mistakes we have presented, you get to start your property investing journey on the right foot. Hopefully, our top tips for property investing can help you craft the right strategy for your property investment portfolio.
Watch this video to find out how our clients purchased an investment property as a retirement strategy:
Maria Papa is a senior property and finance expert specialising in home loans, investment loans, self-employed loans, alt doc loans, car loans, personal loans, and loan protection. She has offices in Sydney, Melbourne, and Manila. If you have questions, you can call Maria at 0430 144 008 or email her at mpapa@maverickfinance.com.au.
Disclaimer: Your full financial situation will need to be reviewed prior to acceptance of any offer or product.