When it comes to buying an investment property, experts agree that the key is be informed. But it’s just as important to do your own research.
Marion Mays, founder and director of the Thalia Stanley Group, said she was concerned by investors giving away their purchasing power by making ill-formed decisions.
“I’ve had clients who have bought through property gurus or investment groups, with no due diligence – now their properties are worth less,” she says.
1. Poor financial structures
This includes investors taking interest-only loans without a safety buffer or borrowing the maximum amount to get into the market, which Ms Mays described as “financial suicide”.
Less commonly, she saw people buying assets in the wrong entity, such as using their personal name instead of a trust. “It’s people setting up financial structures that are not congruent to their personal circumstances,” she explained.
One recent issue was cross-securitisation: that is, banks taking security across all an investor’s assets.
“They have five properties tied up with the same lender, and they can’t sell without the bank’s permission,” she said. “Investors should use different lenders for different properties, to keep things as separate as possible.”
She suggested that in the case where a bank had a family home, a holiday home and investment properties as security from a buyer, the family home is easiest to sell and so if worst came to worst, it would be the first to go.
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2. Lack of solid research and due diligence
Miss Mays said her company was seeing “mum and dad” investors and time-poor business professionals using property investment companies, and not double-checking their research.
“I’m an advocate on engaging a professional service, but you can’t just turn your brain off,” she said.
She recommends using a service that provides multiple independent sources of price data and suburb information, so that investors can verify what they’ve been told.
“Make them back everything up in the form of writing, a report, before you jump in and buy,” she said.
Miss Mays says it is particularly important for investors to do their own due diligence, which can include looking into any future apartment developments planned in an area, as a rising supply of units can dampen price growth if the demand isn’t there.
3. Using emotions to make decisions
A common mistake, Miss Mays said, was trying to buy a property for its lifestyle benefits rather than its fundamentals.
“Using it as a holiday house and an investment property – that doesn’t work,” she said, explaining that holiday homes often had poor yields, poor capital growth and required a lot of maintenance.
Mr Kingsley said liking a property isn’t necessarily a bad thing, as mainstream owner-occupier appeal will make a property easier to sell.
“If it’s got a lot of appeal in a desirable location – that’s great, but it’s got to be in your budget,” he said.
Ms Cole agreed that sticking to the budget was key, and investors “have to be prepared to walk away from a property if the numbers don’t stack up”.
4. Over-borrowing and safety buffers
Miss Mays said it wasn’t uncommon for investors to get over-confident when they had acquired multiple properties.
“What happens is with the strong sense of certainty and superficial confidence, there’s a tendency to go out and buy all these properties,” she said.
But refinancing can become impossible if an investor has borrowed to their limit, particularly considering the tightening in lending restrictions.
“When you’re borrowing 95 per cent – they’ve got no room to move when interest rates go up and rents don’t,” she said.
Mr Kingsley said a long-term mindset is important, pointing out situations such as a couple buying with two incomes, but failing to plan for dropping to a single income when they started a family.
“You don’t want to be forced to sell a property within five to seven years.”
5. Lack of strategic planning
Miss Mays currently helps her clients use investment properties to fund their children’s education, which she cites as one example of using an investment to help achieve specific life goals.
“They are buying investment properties when their kids start primary school, doing it strategically as a way to pay for a private high school.”
This kind of planning is important, says Miss Mays. Often people buy properties because they think that they’re a safe, solid asset class – but they don’t think about what stage of life they’re at.
“Do you need to minimise your tax, will you be short for your super fund? If you don’t match the properties to your lifestyle and circumstances, it’s a ridiculous thing to do.”
Ms Cole said it was important to consider exit strategies when it came closer to retirement.
“Maybe they’ve got $500,000 left on a a million-dollar property – do you sell, how do you get out? Many of these things can be managed.”
She pointed out that someone looking for an ongoing income from an investment property in retirement would need to pay off the property in full.
That was in contrast to a first-time buyer looking to get their foot in the door and chasing capital growth, who might negatively gear an investment property, pay down their debt and then use the property later as a primary place of residence.
Courtesy: Nicole Frost, Domain