With interest rates at record lows and banks falling over themselves to attract new customers, there is a perfect storm building for those who want to get into the investment property market, but many of them will never proceed beyond their first investment purchase because they make simple financial mistakes, hindering their ability to increase their property portfolios.
The most common mistakes are:
Failure to obtain a tax depreciation schedule
Not undertaking a tax depreciation report at the time of settlement. If you don’t have a tax depreciation report completed at the time of settlement then you may not be able to claim the generous tax depreciation benefits that you are entitled to. These can equate to some 60% of the purchase price of the property and this cash flow can assist the investor to purchase more properties. It is therefore important that you obtain the services of a professional tax depreciation company to complete a tax depreciation schedule as soon the property is purchased.
Above all, don’t be afraid to ask for professional assistance when making this important decision. All too many property investors dive in headfirst to a deal which may not be the best option, due to a lack of foresight and market research. You can avoid this by keeping these common mistakes in mind and doing the necessary ground work.
Purchasing property – whether for investment purposes or personal use – is always a big decision to make. This is why it is important to set a carefully constructed budget well in advance of making a final purchase.
Your budget should take into account your current position, as well as any future considerations that might impact your financial situation. Once you have set a budget, make sure that you stick to it and don’t give in to the temptation to spend more than you can afford.
The wrong loan structure for an investment property
Purchasing the property with a principal and interest loan similar to purchasing an owner occupier home. The interest component of the loan is the only part of a home loan that is deductible for tax purposes and the amount of money you spend on paying off the principal limits your cash flow to purchase additional properties. That is why investors prefer interest only loans.
Like professional renovations, building inspections are best left in the hands of a professional. It’s hard to spot flaws in a building’s structure with an untrained eye. Hire an independent building inspector to give you some idea of what this property may really cost you if there are defects.
Carefully choose your property manager
A quick over the phone survey of property managers can quickly arm you with the knowledge of what is in demand from tenants and the rents they are willing to pay. Be sure to ring managers that aren’t connected to the sales agent of the property you are trying to buy. This knowledge can greatly help you plan income and expenditures if you need to make additions to renovations to assist your asset to perform.
Even worse is trying to select the tenant yourself rather than using the services of a number of reliable property management companies. Bad tenants will not pay their rent and damage the property. After experiencing a bad tenant, many first time investors often sell their first investment property because of the financial losses incurred.
Jumping on the bandwagon
If a particular suburb or development is blowing up in the media, it’s natural to want to jump in headfirst. Yet by the time a trend is widely reported, it may already be too late and lead to inflated prices. Take a step back and do your research to find out whether this hotspot is really showing signs of long-term growth. Some factors to consider include postcode performance trends, median prices for similar properties, and how long properties are sitting on the market.
Avoiding these common mistakes when purchasing your first investment property will certainly help put you on the road to investment success.