If you’re a new property investor or looking to stick your toe in the water, do yourself a favour and avoid these investment mistakes:
Not doing the numbers. Becoming a successful investor in the New Zealand property market involves planning and number crunching, not finger crossing. Sometimes without using an investment calculator that property that appears sure fire winner isn’t. Too often new investors don’t understand all the costs involved, says Andrew Bruce, president of the Auckland Property Investors Association.
You’re not going to live in it. “Don’t become too emotional when purchasing the property,” says Bruce. “Treat it as a business transaction.” Houses for sale in lower decile suburbs often have higher yields (return on your investment expressed as percentage). That’s what matters when you need to make your monthly mortgage payment, not if you like the dining room. What’s more, large renovations and new kitchens and bathrooms rarely pay their way in increased rent on the NZ property market.
Investing for reasons of tax. Beware of sales pitches that base investment on tax breaks. Claiming losses on your property investment against tax on your day job (providing you set the ownership up correctly) is often used as a good reason to buy property. Ultimately investing is about making money. So what’s the point of investing a dollar to get 30c back in tax? As an exercise do your sums based on no tax break. Does it still make sense to buy? What if the government takes your tax breaks away?
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Assuming you have the Midas touch. Rookie investors buy a property, see it go up in value and feel like King Kong. Prices can fall and banks can and do call in mortgages. Look at all the risk factors including interest rate movements, ups and downs of rental supply and demand, unplanned maintenance, non-paying or difficult tenants and vacancy rates.
Not understanding the law. You’re going into business and will need to adhere to the Residential Tenancies Act, health and safety, tax laws and others. Beware of “tainting” your properties. Tainting means you’re trading properties (AKA buy with the intention of selling at a profit) or you’re linked with a builder or property developer you will pay income tax on your capital gains on all your investments. Ouch.
Failing to run your investment properties as a business. Don’t be a set and forget property investor, says Bruce. You’ll need to become an expert in property management and tenancy law, do inspections or risk losing insurance cover, undertake regular rent reviews, and always check rents have been received. Amateur landlords who don’t do full tenant background checks often get themselves in hot water. Tenants can be hard work. If you don’t manage them professionally, however, your investment can turn to custard.
Keeping all your mortgages with the same lender. If one investment goes wrong, it’s possible for the bank to call in the mortgages on all of your mortgages. It’s better to spread your mortgages across different banks so they can’t fall over like dominoes. See a mortgage broker for advice.
If you think you could make these mistakes then it’s probably a good time to mix with experienced investors at your local property investor association or online. Reading investment books is well worthwhile.
