The Five Biggest Mistakes You Can Make In Property Investing (That You Don’t Know About)
A quick search of the internet will reveal all sorts of common property investment mistakes to avoid. In this article, DG Institute founder and CEO Dominique Grubisa offers property investment advice to help you avoid the biggest mistakes that beginner property investors make.
Things to know when buying an investment property?
- Not Understanding the Time Value of Money
- Not Thinking About the Buying Entity
- Misinterpreting Property Contract Dates
- Failing to Protect Yourself With the Contract
- Not Doing Due Diligence
Most first time property investors in Australia don’t know what they don’t know.
This means that they’re not even aware of some of the issues that can crop up during their real estate investment journeys. Their research reveals many problems to look out for.
However, there are still plenty of mistakes that they don’t protect themselves from because they don’t know about them. It’s therefore critical to gain insights into tips for first time property investors.
When it comes to property investment, lack of knowledge can delay a deal or even cost you thousands of dollars. Here are five of the biggest first-time investment mistakes that you may not know about.
Mistake #1 – Not Understanding the Time Value of Money
Investopedia offers the following definition for the time value of money:
“The time value of money (TVM) is the concept that money available at the present time is worth more than the identical sum in the future due to its potential earning capacity.”
In property investing, money is worth more to you if you don’t have to part with it.
Imagine that somebody offered you a choice between $800 right now and $1,000 at some point in the future. Most people reading this would take the $800 now.
The same goes for property sellers. Many will take less cash if you provide them with an unconditional offer that puts that money in their hands immediately.
The mistake for an investor is that you may take advantage of this only to find that the loss of funds affects the investment. You’ve spent money that you could use right now, which means you struggle in the future.
As a buyer, you’re in a position to offer more to get a deal over the line if you don’t have to pay the money right now. For example, you could create an option agreement that gives you control over the property without immediate payment. The same goes for a long settlement period that allows you to get to work and pay at a later date.
In both cases, you’re saving money in the present that you can use to create more value later.
Plus, you’re creating time. Don’t buy right now and haemorrhage money as you work on the development. Create a deal that gives you control without immediate payment.
Mistake #2 – Not Thinking About the Buying Entity
You have plenty of options available to you when buying an investment property. You could buy in your own name, as a company, or as part of a trust.
Each has its own benefits and issues. Choosing the wrong buying entity for your strategy can lead to ramifications later on.
Ask yourself what you’re buying the property for. If you’re looking to flip it, buying through a trust may not be the best option. You may face restrictions on how much value you can add to the property, which limits the potential for profit. In this case, buying as a company will mean you only pay income tax on the profits, therefore avoiding Capital Gains Tax (CGT) entirely .
A property trust becomes a more viable option if you’re intending to hold the property for a long time. For example, you could invest using a Self-Managed Super Fund (SMSF). This entitles you to various tax benefits that you don’t have when buying in your own name.
Start with the end in mind and make your selection based on that goal.
Mistake #3 – Misinterpreting Property Contract Dates
Imagine that you’ve signed a long settlement contract.
You’re delighted to have control of the property without having to spend money right now. However, this also opens up the possibility of a common mistake.
The long settlement leads to you misinterpreting the relevant date for tax purposes.
That date is always the one that is on the contract. It is not the date on which settlement occurs.
For example, you may not settle for two years after signing the contract. If that’s the case, it’s the date from two years ago that’s relevant to you for tax purposes.
This is so important because tax laws change constantly. The laws at the time of settlement may not be the same as those when you signed the contract. This can lead to you making errors with your tax that can cost you thousands of dollars.
Mistake #4 – Failing to Protect Yourself With the Contract
There are many terms that you can put into a contract to protect yourself as a buyer. These are special conditions that can protect you from a bad investment.
For example, a special condition may be that you have a pest inspection carried out before settling. Or, you may create the contract subject to getting finance.
Many first-time investors fail to create any of these special conditions. Instead, they make unconditional offers that obligate them to pay straight away. Furthermore, this lack of condition leaves them unprotected if something isn’t right with the property.
You’ll often make unconditional offers at an auction. However, you have the ability to add conditions, even in this situation. You can speak to the seller’s agent prior to the auction to let them know about your interest in a property. This meeting offers you the chance to negotiate conditions that will get written into the contract subject to you making the winning bid.
Mistake #5 – Not Doing Due Diligence
Poor due diligence is one of the chief causes of the failure of a business venture.
You have to see investing as a business. You’re spending money with the goal of creating a product that will earn you more money in the future. Approaching investing in a casual manner can lead to you getting burned.
Due diligence will help you to confirm that all of the financial aspects of the deal add up. As an article published on the Harvard Business School website puts it:
“…Due diligence should play a critical role by imposing objective discipline on the financial side of the process. What you find in your bottom-up assessment of the target and its industry must translate into concrete benefits in revenue, cost and earnings, and, ultimately, cash flow.”
However, due diligence extends beyond the property financial planning.
Are there zoning implications for you to consider? Does the property’s title contain easements or restrictive covenants? Does the property meet the needs of the local population?
These are all important questions to ask during this period.
It’s also a wise idea to take photographs of the property during your first viewing, especially if you intend on getting a long settlement. If something with the property changes between the contract signing and settlement, you can use these photos as proof.
Take your time when buying an investment property. Conduct appropriate research and don’t allow any seller to rush you along. There are always new opportunities to find if this one doesn’t work out.
Avoid the Uncommon Mistakes
You already know about the common mistakes that many new investors make.
These are five of the uncommon blunders that you may not have heard about before. Each can cost you a lot of money so it’s crucial that you account for them when starting out in property investments.
Misunderstanding the relevant dates or buying using the wrong entity opens you up to tax issues. Failing to conduct due diligence or to protect yourself in the contract could lead to you buying a poor investment property.
If you’re looking for finance or you’re having a hard time, or you just want to explore other opportunities, join Dominique Grubisa for this property investment webinar and learn how you can find an undervalued property that you can potentially purchase 10% – 40% below market value from motivated vendors.
Lawyer, Asset Protection Specialist and Property Educator
Dominique Grubisa is a practising legal practitioner with over 22 years of legal and commercial experience. She is a property investor and developer, an entrepreneur with businesses in Australia and Southeast Asia, a speaker, educator, writer and published author. You may contact Dominique at firstname.lastname@example.org
This column has been written for general information purposes only. It is not intended as legal, financial or investment advice and should not be construed or relied on as such.