With property markets on the rise in many parts of the nation, savvy investors should be looking to leverage this golden opportunity to plan for a better, more secure financial future, yet so many people ruin their prospects of success because they have the wrong mindset. Here are the five most common misconceptions that could impact your success as a property investor.
- ‘We don’t need no education’
With apologies to Pink Floyd, yes you most certainly do! In fact, entering the market without a sound understanding of property market fundamentals including which markets are set to perform best over the next 7-10 years and why, which markets are yielding the best rental returns and how to best leverage your own personal financial circumstances and borrowing capacity is a wasted opportunity.
The first thing potential investors should do is to seek out tailored education about these property market fundamentals (researched and backed by historical data and credible forward-looking research) and look to improve their financial literacy. Look for a reputable and personalised property investment workshop or course and forget the spruikers offering free advice and seminars, which are usually just an opportunity for them to ‘introduce’ their potential investment properties to you.
- Professional advice isn’t needed – I can do my own research online
Just as you need a life plan for your other financial needs, you also need a carefully planned strategy for investing in property. A Property Wealth Planner or Property Investment Advisor, is someone who has experience, skills and the appropriate qualifications in several areas including property investment finance broking, so they are equipped to help you understand how to use and build equity and incorporate other finance techniques to increase returns while minimising risk. They should also be a qualified investment property buyers agent with capability in researching the whole Australian property market and ideally a qualified property investment advisor (QPIA) with the Property Investment Professionals of Australia.
- I need to save a deposit for my investment property
With as little as 30 per cent equity in an existing property (such as your home), is it possible to use that equity to invest in other property safely without the need for any extra cash. For property investment experts, tapping into this dormant equity has long been a tried-and-tested formula for success and you may have heard this referred to as ‘lazy equity’.
Equity is the difference between the current market value of your property and the amount you owe on your current loan. Over time, as capital growth pushes the value of property up and you steadily pay off your loan, the amount you owe compared to the value of the property will widen and your equity increases.
This equity or ‘untapped wealth’ is an incredibly powerful tool as it effectively becomes your borrowing power. Many homeowners may not realise what a goldmine they are sitting on and certainly don’t realise that they can tap into this ‘lazy equity’ to fund another property safely without the need for extra cash.
- Debt is a bad thing
Successful investors treat debt as a tool to build wealth rather than seeing it as a burden. They also understand the difference between ‘good’ and ‘bad’ debt. This is an important mindset when creating your finance strategy, whether you’re looking to buy or refinance the home you live in, or borrow to invest in property, now or in the future.
The aim is not to overstretch yourself financially – the key is to utilise your borrowing capacity for maximum effect. Having a clear understanding of your equity position and creating a safe borrowing strategy is the key. Many people are surprised to know that it can cost just $50 a week to fund an investment property. To get peace of mind, have a buffer. You can borrow an extra $20,000 to $50,000 just in case something untoward happens. With this buffer – and taking the appropriate risk-management steps – you build in added protection.
- Big risks do not always equal a big pay-off
On the flip side, some property investors roll the dice when there is no need to do so. Topping the list of risky behaviour is buying a property off the plan without the right advice.
The biggest risk of long term off the plan purchases is that a lender’s loan approval only lasts up to 6 months, so if the property is further away than that from completion, you run the risk of not being able to obtain finance to settle. If this happens, you can lose far more than your 10 per cent deposit, which could send you bankrupt, or at least significantly set you back. That’s not to say that off-the-plan property isn’t right for everyone, however you should always get professional advice before proceeding with an off-the-plan purchase.
Another big risk is not having your various insurance policies in place, especially income protection, life insurance and trauma cover in the event of a serious injury or personal crisis that could prevent you from meeting your future mortgage commitments