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Top 5 things to avoid when choosing an investment property

Marty McDonald - Thursday, December 03, 2015

Buying off the Plan - Risk vs Reward

Buying off the plan is a high risk investment. When agreeing to a buy now, pay later contract the inherent risk is that you won’t get what you paid for. Developers will use incentives like free holidays or even free cars to try and sell the plan; however this is usually absorbed into the purchase price.  New properties don’t seem to achieve the same capital growth as older established dwellings with proven track records. This is partly due to the flooded supply of new apartments increasing every year.  Around 25,000 new apartments will be hitting the market within the next 12 months that will be in direct competition to your new apartment.

Focusing on tax benefits

Purchasing a property with anything but capital growth in mind is a big mistake when it comes to investment. While certain tax benefits can be good, the idea is that the value of the property increases to outweigh the overall loss incremented by investment related expenses. Therefore if you purchase a property without capital growth in mind, you can find yourself losing allot of money. 

Focusing on high yields and not on capital growth

Single industry towns such as mining towns have the capacity to deliver an above average rental yield. This is due to a high demand of workers during robust periods of the industry. They cannot often be sourced within the town and thus we see an influx of people who don’t have secured jobs and are not looking to buy just rent. 
These properties are outside central urban area and often have a low property value. However, the good cash flow and rental yield of the properties attracts investors increasing property prices. This is what is called an artificial property boom, brought on purely by the single industry. Unfortunately, economic downturn, changes in the industry and fluctuations in the Aussie dollar are all it takes to bring it all crashing down. Within weeks rents fall dramatically and property values begin to fall. Investors find it impossible to sell. This is the very situation we have seen in towns like Moranbah and Port headland with property prices falling by 70% in the last few months. 
Hence, while buying in single industry towns can be done successfully perfect ‘market timing’ and strategy is needed and for many the risk is just too high. 

Not choosing the right property type

Student accommodation, serviced apartments, defence housing, commercial properties and mixed zoning properties are all property types that banks consider ‘risky.’  Banks will often restrict loan to value ratios (LVR’s). If it’s considered a risky purchase by the banks its best to consider if this is a good option for your investment. 
The best investment property is a residential, single-family dwelling. These type of homes tend to attract long-term term tenants such as families and couples. These tenants are more likely to be financially stable and regularly pay the rent. This is therefore a low-cost property type both for the investor and the bank. 

Not Factoring in all of the Costs

Investment strategies require active management to succeed. It’s a common misconception that they are a passive source of income. Properties that require a higher level of maintenance need to be factored into your budget. Rental income and purchase price are only the tip of the iceberg. Once you become a landlord, you are responsible for all costs such as repairs and maintenance.  If you take out a mortgage you need to carefully consider if you will be able to make payments in a number of circumstances. These include bad tenants who default on their payments and the property being vacant for a period of time.  
Even those who choose to purchase an investment property for capital appreciation rather than cash flow will need to plan for curveballs. A sudden decline in property prices could cause you to lose money if you are forced to sell. Think about whether or not you can afford to hold onto the property for an extended time period if necessary.

About the Author: Marty McDonald is principal of mortgage broker “Mortgage Experts”. Marty specialises in assisting active property investors with loan structuring advice and implementation as well as helping credit worthy borrowers with slightly outside the box income and employment situations. Find Marty on  and LinkedIn.

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