Newbies In The Market: Bad Property Investment Advice You Should Avoid
Property is worth trillions of dollars in Australia. We have a serious love affair with bricks and mortar as an investment class. The problem is that this means it’s also where all sorts of people are trying to make a buck by trying to sell you education, advice, or stumped up investment opportunities.
And while it is crucial to educate yourself and make sure you’re surrounded by the right professionals, there is plenty of bogus advice out there. Here are 8 misleading tips to be wary of.
1. It worked for me, so it will definitely work for you
Property investment is anything but one size fits all. Just because one person had success with flipping and selling, building granny flats, or buying in mining towns doesn’t mean it’s the right thing for you to do, or the right time.
2. Who needs a license? Check out this awesome opportunity
Never listen to advice from someone without the appropriate license and plenty of experience. If someone is trying to sell you an opportunity and you can’t find plenty of information about their business and track record easily online, steer clear.
3. This property is never vacant
Having your property tenanted is extremely important. Long term tenants are great, but they may suddenly leave, or refuse to pay a rent increase and finding the next tenants is hard. Vacancy periods are more common than property managers care to admit and they can really eat into your wealth.
4. Landlords have all the power
When your property is tenanted, it may belong to you, but it’s the tenant’s home and the law is often on their side. You can’t turn up unannounced, or do a reno, or raise the rent mid-lease, or kick tenants out for damaging the place without a lengthy legal process. Even if they stop paying their rent, evicting them is complex and can take weeks or even months, during which they’ll be living in your place for free and probably not be too worried about looking after it. Landlord insurance is essential to mitigate some of the risk.
5. It’s easy to buy, refinance and quickly free up equity
Refinancing and accessing equity can be relatively simple, but only if you’ve set yourself up the right way to begin with. You may have heard plenty of Binvested client stories where they have withdrawn equity right away after settlement, but often that’s because they’ve used a broker like Zinger Finance that finds and writes loans with rapid portfolio growth at front of mind. Many banks don’t allow you to do so right away and you may even be locked into lengthy periods of time where you have no room to move.
6. All your equity is yours to use
When you free up equity to buy your next property, banks won’t let you use it all. They need to protect themselves in case values fall or you default. Therefore they calculate your ‘usable equity’ which may be the equity you have on 80% of the property’s value. Even then, you have to factor in the associated costs of buying the next property: stamp duty, legal fees, inspection report, buyer’s agent fees, etc, so you may end up with a much smaller deposit than you originally thought.
7. You can’t lose when you use a mortgage broker
Yes they are free for clients and get paid their commissions by banks, so how do you know they’re doing the right thing by you? They might be recommending you apply for a loan that gets them the best commission, or they may have deals with only a certain number of lenders on their books. Yes, mortgage brokers can be very helpful with their knowledge and steering you towards loans you are likely to be approved for, but make sure you ask them for as much detail as you can. Can I refinance soon after settlement? How long am I otherwise locked in for? How many lenders are on your books and what do they pay you? What are some of the best deals you’ve got for clients?
8. You should sell your investment property
Renovation reality shows always seem to end with an auction and either the jubilation of a big windfall, or the heartbreak of “passing in” after all the hard work. But even a good result at the time doesn’t sound so great after some years go by. The winning property on the first series of The Block, for example, was an apartment that sold in 2003 in Bondi for $751,000. If you had sold an apartment for that much in Bondi back then, how happy would you be now? If you had tenanted it, you would have made plenty of money in rent and a property like that would likely be worth $2 million plus these days. That’s a lot of equity for further investment.
If you hold, a property can keep making you money forever. If you sell, that’s all you’ll make…and you’ll also have to pay tax.