As September 2010 passes, renters in Victoria have again seen a month with no sign…
Buying property can be a sound investment, providing a steady source of rental income and an eventual additional profit when you choose to sell. Yet it’s important to choose the right property in order to maximise these profits. New property investors have a tendency to make a purchase simply because they have fallen in love with a property, and believe that they can take on the roles of handyman, landlord, and accountant all at the same time.
The truth of the matter is that effectively buying and managing a property for investment purposes requires time, skill, and experience. The process often runs more smoothly with the assistance of a real estate agent or property management firm, who can help you make a savvy business decision and manage your property more efficiently. You can find a professional to work with by registering your details at LocalAgentFinder, and start comparing real estate experts in your area.
The following common mistakes are also important to keep in mind so that you can avoid them on your search for the right investment opportunity.
Mistake #1: Not Factoring in all of the Costs
It’s a common misconception that purchasing property provides you with a passive source of income. However, this investment strategy actually requires active management in order to succeed. Therefore, when you are first calculating the costs of your investment you will want to keep the current market in mind. The following questions can help you determine what the real cost of your investment will be:
- What type of rental properties are most in demand?
- Is there currently an abundance or shortage of rental properties?
- Is the area experiencing a period of growth or decline?
- What is the average rate of occupancy?
- What condition is the property in?
- Will you need to renovate before you can rent out this property?
It’s important to ask these types of questions before you make a purchase, so that you can recognize the first signs of a bad investment early on in the process. These factors will influence the amount you must pay upfront, as well as whether or not the property will end up being cash flow positive.
Older properties or those which require a higher level of maintenance will cost more in the long run, and this must be factored in to your budget. The rental income and purchase price are only the first parts of the equation. Once you become a landlord, you will be the individual responsible for all of the costs of maintenance and repairs, whether the property has been rented out or not. If you take out a mortgage on the property, think carefully if you will still be able to make these payments should you rent to bad tenants who default on their payments, or if your property is vacant for an extended time period.
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.
Owning even a single property can require a great deal of work, which is why many investors choose to work with a property management company. They can help alleviate many of these issues and manage risk, by marketing your property, managing the collection of rent, arranging for building maintenance, and helping navigate tenancy laws. Whether you need assistance remotely or locally, it’s beneficial to consider the services of a property manager. In many cases, the cost of being a hands-on landlord can sometimes be higher than the cost of hiring a professional to do the work for you.
Mistake #2: Lacking the Skill or Experience to Manage Problem Tenants
Although many tenants will pay their rent in a timely manner, you must be prepared as a landlord to contend with those who don’t. Do you have what it takes to make sure that your rental payments are collected when due each month? Bad tenants usually have compelling reasons for tardy rent payments. Do you think you will be able to actively engage with the process of performing credit checks, screening potential tenants, collecting rental payments, and pursuing action when disputes arise? If not, you must consider whether being a landlord is really right for you.
Another option is to look into the services of a property management company. Although this will be an additional cost to consider, the cost is tax deductible and you will gain some peace of mind as a result. It’s a good idea to remember that using a property manager doesn’t allow you to get out of managing your investment completely, but it functions as a partnership to help maximise your returns. You can find property management companies by using the free online dashboard at LocalAgentFinder as a no-obligation comparison tool.
Mistake #3: Not Considering the Risk
Investing in property is like investing in the stock market, and should not be treated differently. If you want to be successful, you must manage it with a clear end goal in mind. Some may purchase property simply as a way to diversify their portfolio, and this can work out if you have the skill and experience to succeed. Yet managing a property can be a full time job in itself, and there are certainly risks involved.
An example of this could be the first time investor who is hoping to take advantage of capital appreciation in a swiftly moving property market. Think about how quickly a market can change by looking back to the 2008 financial crisis. The overall market can impact property sales quickly, which can cause a desire for quick profit to suddenly backfire. Be sure to think carefully about whether you are looking at this investment as a short or long term asset, and what your exit strategy will look like should you need to sell. Look carefully at the numbers when you are considering any property and take the time to analyse projected income figures. How will the costs of yearly improvements and management fees factor into the overall profit?
Mistake #4: Not Performing Due Diligence on a Potential Property Management Company
You may have done all your homework carefully before making a purchase, considering your long term investment goals, costs, and exit strategy. You have cash reserves ready should the market shift; and you have chosen the right property to meet your needs. However, if you are planning on using a property management company then you will need to apply this same time and effort into finding the right one. Ideally, your property management firm will have the right level of experience to best represent your interests.
There are always horror stories of property managers who don’t follow up with complaints, fail to screen tenants, and are slow to respond to any calls for repair. You can avoid these types of problems if you choose your property management company wisely. When choosing a real estate agent, you would want to see sales data first. Feel free to interview potential property managers in the same way to find out more about how they would represent your property. Ask about their marketing and management strategies, and check their references. Rather than simply choosing the company with the lowest fees, look at their experience and reputation. In most cases, a property management company will take between 5 and 8% of the overall rental income. However, this money is well spent if the company makes your life easier and protects your investment.
Getting started as a property investor involves a bit of trial and error. You can expect to make a few mistakes along the way. However, it’s possible to mitigate these potential risks by having a plan in place, teaming up with an experienced property manager, and ensuring that you have an exit strategy.
You can work on finding the right property manager or real estate agent to represent you as you search for the perfect property by registering now at LocalAgentFinder. Landlords have been using this service since 2007 to connect with experts in the field and maximise their returns.
The following articles may also serve as a good resource:
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