Four mistakes all property investors must avoid

Here we are in a new year and the beginning of a new property cycle. It’s a great time to be a property investor – fortunes were made last time we were at this stage of the property cycle, but not by all property investors.

Look at the facts… despite there being one and a half million property investors in Australia, most don’t own more than one or two properties. This means that most property investors don’t ever develop the financial independence they desire.

Here’s a startling, but true fact: only one in 200 property investors owns five or more investment properties. And you need at least that many to become financially independent.

To help you steer safely into a new year of property investing I would like to outline the four biggest mistakes I’ve seen investors make, so you can avoid them and propel your wealth as you catch the next property wave.

1. Buying the wrong property.

While all properties increase in value over time, some increase in value significantly more than others.

When you ask investors why they purchased their property they’ll say things like: it was close to where they live, close to where they holiday or close to where they want to retire. These are all emotional reasons for buying property, and possibly a good way to buy your home, but they are not the right way to buy an investment property.

To become financially free you need to own the right type of property – one that grows in value sufficiently to enable you to borrow against its higher value, thereby allowing you to leverage off your increased equity thus giving you the funds to buy further properties.

2. Not having a plan.

Most Australians spend more time planning where they’re going to holiday than they do planning their financial future. If you don’t have an investment strategy or plan, how can you hope to develop financial independence?

Over the years I have found most Australians fall into four categories:

1. They don’t invest at all.
The majority of Australians fall into this is the group – they just haven’t taken action yet.

2. They don’t invest enough.
Many Australians have bought a home and understand the power of appreciating real estate, but they want to pay off there home before they invest in more real estate. This means they are not using the untapped equity in their home to further their financial independence.

3. They invest too much.
Some people invest too much – yes that’s possible! They have taken unnecessary risks and borrowed too much. Some of these investors came unstuck over the last year or two as property values fell, while others will run into trouble as interest rates rise in the future.

4. Those who invest the right amount.
Then there are those who invest just the right amount. Not too little. Not too much. They invest the right amount – sounds a bit like Goldilocks doesn’t it? These investors have an investment strategy and their investment property purchases are part of this plan.

The problem is that if you don’t have a strategy it’s easy to get distracted by all the “opportunities” that keep cropping up. Unfortunately many of these “opportunities” don’t work out as expected. Look at all the investors who bought off the plan or in the so-called next “hot spot”, only to see the value of their properties underperform.

3. Not reviewing their property portfolio.

Sure, property is a long-term investment and the costs of buying and selling real estate are considerable, but that doesn’t mean you should fall into the trap of not reviewing your property portfolio.

Of course you can’t easily “swap” properties or reweight your property portfolio like you would shares. But that doesn’t mean you shouldn’t regularly review your portfolio to see what you can do to improve or upgrade your properties.

When was the last time you checked to make sure you were getting the best rents or that your mortgage was appropriate for the current times? Maybe it’s time to refinance against your increased equity and use the funds to buy further properties?

And sometimes it is appropriate to consider selling an underperforming property to enable you to buy a better investment.

It’s a bit like going to a financial planner to review your share portfolio or super fund. He’d say something like: “We are starting a economic cycle so now is a good time to see which sectors will perform best over the next few years and which shares will outperform”. So you would sell some shares and reweight your portfolio into sectors that will outperform.

It’s much the same with your property portfolio.

Do you own the type of properties that will allow you to take advantage of the next property cycle? Remember, over the next few years some properties will strongly outperform others. If you own secondary properties or real estate in areas that are unlikely to benefit from strong capital growth, it may be worth selling up and replacing them with the type of property that will help you develop long-term financial independence.

And the last common mistake I see investors make is…

4. Not managing their risk.

Many investors don’t understand the risks associated with property investment and therefore don’t manage them correctly.

One common error I see investors make is not having sufficient financial buffers to see them through from one property cycle to the next. Smart investors don’t only buy properties; they buy time by having financial buffers. They have sufficient financial buffers in their lines of credit or offset account to not only cover their negative gearing but to see them through the down times like we experienced in the last few years.

Another way smart property investors protect their assets is to buy them in the correct ownership structures to legally minimise their tax and protect their assets. I have found that most wealthy property investors own nothing in their own names, but control their assets through companies or trusts.

To help make 2010 your best year ever in property become financially fluent by learning from other’s mistakes rather than your own. I’ll give you my insights through this blog every Wednesday and as a way of saying thank you for following my blog, I’d like to give you a gift of learning: an eBook The Science of Getting Rich, plus two tele-seminar downloads, including the Great Property Debate, where six Australian property experts give their forecasts for 2010. Just click here now to receive my gift to you.

Michael Yardney is the director of Metropole Property Investment Strategists, a best-selling author and one of Australia’s leading experts in wealth creation through property. For more information about Michael visit www.metropole.com.au and www.PropertyUpdate.com.au.

Look out for the newly updated 3rd edition of his best selling book How to Grow a Multi-Million Dollar Property Portfolio – in your spare time.