When property investment goes wrong

Last week’s RBA rate hold announcement was great news for Australian property investors. With the cash rate set to stay at 2.5 percent, a high demand for rental properties and property prices across Australia booming, it presents attractive market conditions for property investors.

In March, 39.6 percent of all new home loan applications were processed for investors, that’s two out of every five new home loans, according to mortgage lenders Australian Finance Group (AFG).  If this current trends continues, many Australians will buy their first property investment in the next 12 months but just because the market is favourable doesn’t mean there aren’t also risks to property investment.

Here are some of the things that can go wrong in property investment:

Buying the wrong property

Yes, property increases in value over time – but some properties increase in value faster and at more significant rates. And some properties can lose money, such as apartments in Melbourne’s Docklands that have failed to increase in value in the past 10 years due to an oversupply.

“Everyone is looking for the perfect property they can buy for cheap and rent for a lot of money, but tenants want to live in areas with a great lifestyle,” estate agent Ercan Ersan of Bresic Whitney Glebe said.

“We’ve heard horror stories of investors buying off-the-plan properties in the western suburbs of Sydney thinking that will be the next growth area, but they’ve ended up selling for a loss.

“With investment properties, it is always about location and making sure you are close to schools, universities, hospitals and amenities.”

To avoid a financial loss, do your homework and steer clear of areas with an oversupply of apartments and buy in an in-demand location attractive to renters and with a long track record of capital growth.

Choosing the wrong tenants

If you buy the right property, finding the right tenants should be easy. And it should help avoid the problem of lost income through not being able to rent out the property. There are many things to consider when it comes to finding suitable tenants: for example, young families may provide more stability as they tend to stay in one place for years but young children and pets can also cause more wear and tear to the property.

You may also find yourself stuck with tenants who damage the property through neglect or ones that are always late in their rent payments. Managing investment properties – whether it’s a single property or a portfolio of several properties – takes a lot of work and a good rental property agent can be the deciding factor in success or failure in the property investing game.

“The biggest mistake people make is not screening tenants adequately,” Ersan added.

“They look at the short-term return of who will give them the highest rent instead of choosing tenants with a good rental history and references.”

Not having enough cash flow

Property investment is like owning a business. Having a cash reserve to fall back on in tough times will help you hang on to your property and allow you to attend to any unexpected repairs or even hold out for a more suitable tenant.

Ersan advises holding 10 percent of the value of a property in savings to meet unexpected costs, such as special levies or urgent repairs.

“The costs don’t just stop with the mortgage repayments, and that’s where some investors can go wrong by over-extending themselves,” he said.

“Often people don’t realise how much the whole process will cost, so it’s important they do more research before buying an investment property.”

Not having a strategy

One of the most important keys to success in property investment is having a strategy in place and sticking to it, according to property investment expert Michael Yardney, CEO of Metropole Property Strategists. A lack of strategy can lead to financial losses.

“The problem is that if you don’t have a strategy it’s easy to get distracted by all the so-called ‘opportunities’ that keep cropping up, many of which don’t work out as expected,” Yardney wrote on his blog last month.

“Just look at all the investors who bought off-the-plan or in what they hoped would be the next ‘hot spot’, only to see the value of their properties underperform.”

To avoid wasting your time and more importantly money on unsuccessful property investments, Yardney recommends buying high growth properties and adding value to them through renovations or redevelopment over a 10 to 15-year period.

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