5 biggest mistakes made by novice property investors
Investing in property has proven to generate excellent returns since the birth of the buy-to-let mortgage two decades ago. And following the pension reforms in April 2015, the number of retirees investing their tax free cash lump sum into property has also increased.
However, with many changes on the horizon for landlords and buy-to-let investors, it’s more important than ever to be professional and prepared. After all, the need for high quality, affordable rented accommodation is not going away.
So here, I outline five of the biggest mistakes that amateur landlords and novice property investors make.
1. Starting with a flawed strategy
Successful investor Warren Buffet famously said: “You only learn who has been swimming naked when the tide goes out”. This is especially true in the property industry. It’s easier to be successful in a rising market, but it’s not until landlords are faced with the challenges of a falling market that the robustness of theirproperty investment model is really tested. Various external factors can suddenly turn a profitable property portfolio into an unwanted liability producing limited or negative cash flow.
For example, rising interest rates can accordingly increase monthly mortgage payments, reducing gross profit; a property market crash could force some landlords into negative equity and limit mortgage product availability; and increased void periods will diminish rental income.
These are important factors to consider when devising a property investment strategy. Investors should make sure they follow a strategy that works for them. If they’re in the buy to sell game, then timing is key. If they want to live off the income produced from their buy-to-let property, then maximising rental income is crucial to ensure they can weather market fluctuations.
Clear and proven property investment strategies can protect landlords when the tide goes out!
2. Not taking action
The Great Wall of China was not built out of pure aspiration. It was built by millions of people that decided to take consistent action over a long period of time – more than two decades I believe.
Many people aspire to get into the property investment game, but without taking action, it remains just a pipe dream. Someone could have the funds and even the knowledge, but find that they suffer from ‘analysis paralysis’. Carrying out thorough due diligence is one thing, but over analysing every situation and merely waiting for something to happen can mean an investor continues to miss out on the benefits of investing in property.
3. Not understanding the numbers
A lot of people believe that property is a ‘quick and easy’ money making tool and subsequently fail to do the math.
As with any investment, understanding the numbers is crucial in working out how profitable your investment would be. Property investors should identify potential risks to their bottom line and work out mitigation strategies.
Taking in to account various costs associated with building and running a property portfolio should be thoroughly stress-tested. It’s astonishing to think that more than 10% of landlords fail to take any costs into consideration when calculating the financial performance of their portfolio. Worse than that, a huge number of investors do not factor in other costs or losses such as void periods, stamp duty, letting agent fees and maintenance.
4. Failing to get educated or support
Like I said before, it’s easier than many people think to get into property investment so naïvely, many people do so without doing their homework. It’s unlikely you’d go on holiday without doing any research, so why invest in property with no information?
I cannot stress enough that would-be property investors need to get educated. There are tons of free and paid for resources available out there. Personally though, I believe that good advice is rarely free so investing in your own education is definitely worth it.
Also surround yourself and connect with people who have a proven track record in property investment. Learn from them and their mistakes.
5. Getting emotionally involved
Many property investors fail to remember that they will not be living in the property they are buying. They get too emotionally involved and fail to look at a property objectively. Either they let irrelevant features such as décor put them off, which could result in a missed opportunity, or they like the property so much that they end up paying too much.
It is important to have an open mind, understand how to look for potential in a property and keep the end in sight. If your plan is to buy and sell for a profit, how quickly and cost-effectively can you add value? If the property will be rented, what will your potential tenants be looking for?
As 90% of the world’s wealth is either made from, or held in property, it is clear that the asset class is a great investment. However, without a strategic direction and willingness to take appropriate action and learn from others, novice property investors will face many avoidable challenges.