Property investment is exciting! Whether you’re renovating an existing property, developing land or building new homes, seeing your investment come together in a tangible way gets the blood pumping.
It feels good to daydream about the 100s of thousands and even millions you’ll make from your property when the time comes.
So it makes sense that many people want to build a property portfolio as fast as possible. But with the potential for big reward comes 03 common mistakes that are likely to cost you more than you might think.
When getting investment property advice from a property sourcing company you’ll find that they’ll show you how you can add 02 or 03 houses to your investment property portfolio at a time. Exciting right?
For people with high incomes and small amounts of debt, yes! But that isn’t everyone. If you’re trying to squeeze multiple properties into your servicing ability all at once, proceed with caution.
Lenders like strong serviceability because there is less risk for them. Though this can feel like a constraint when you want to add another property to your portfolio and the bank says you can’t, it actually means by not investing in too many houses at once you’re probably going to avoid taking on too much risk also.
Consider this scenario:
When investing in new builds, many times you’ll receive 10% of the entire loan from a lender and then building starts. Unfortunately, in Aotearoa (New Zealand) it can take a year for the builder to complete the house, at which time you’ll need to go to the same or a different lender to get the other 90% of the home loan. In that year your pre-approval usually will have expired, and you’ll need to be reassessed.
If your income, expenses and debt levels are about the same as when you initially applied for the 10% of the home loan on the rental property, then you’re likely to get the 90% of the loan with no dramas.
But what happens when in that time you’ve drastically changed your financial situation by adding lots more debt from an additional investment property?
In that scenario you’re a lot less likely to get approved for the other 90% of the new build loan. That means your new build would be ready, but you wouldn’t have the money to complete the transaction. The property sourcing company would have already collected their commission from the builder, and you’d be left owing $100s of thousands to the builder.
Though there are a few ways to protect yourself in that scenario, the best way is to avoid putting yourself in the situation in the first place by only adding properties to your portfolio from a strong financial position.
No Strategy (Magpie syndrome)
Without a property investment strategy, you’re more likely to behave like a magpie than an owl – chasing after every shiny new investment opportunity that comes your way.
The problem with making decisions on the fly is it’s easier to make an emotional decision rather than a smart one.
You’ll know what I’m talking about if you’ve ever been to a buffet while trying to lose weight. It doesn’t end well.
Most of us aren’t great at disciplining ourselves, so when it comes to investing in property all we see is the potential for making money, not the risks that could cripple us financially.
If you work in the property industry this is a particular risk for you. You’ll see so many opportunities and feel like you’d be a fool not to take advantage of them.
Having a property investment strategy and plan means you’d have decided how you want to grow your portfolio before the opportunities come flooding your way – before the rose-tinted glasses are on.
A good property investment strategy and plan includes:
- your goals (i.e., retire early or have a comfortable retirement)
- what type of properties to invest in
- how often to invest based on your financial situation
- what financial gain you want from investing
Also consider your values and priorities and make sure your strategy and plan stay true to them. You won’t find yourself investing out of greed or using “get rich quick” schemes, which can lead to losing it all quickly.
Delaying Personal or Family Goals
The allure of making as much money as fast as possible is too much for many property investors. Their behaviour becomes similar to an addict looking for just one more hit – or house in this case. Greed can take over without even noticing and cause many investors to postpone having children, getting married or even buying a home that better suits their own family.
To avoid falling prey to property investment addiction (our term), think long and hard about WHY you are building wealth to begin with. For many people their family is precisely the reason they started investing in property.
Whether you want to help your children get into homeownership later in life or be financially free enough to work in your passion without worrying about money, living a happy life is at the centre of investing in property. Property investment is and should only how you reach your personal and family goals, not the reason to not have the life and family you want.
Keep your why clear and central to your investments and you won’t put money in front of yourself and your family.
Stay focused on your WHY
With property investment you stand to gain a lot, but you also could experience huge financial, personal and family loses.
So before you write your property investment strategy and plan and definitely before you sign up for your first or next investment property, have a chat with your partner to crystalise your WHY.
Here are some questions to consider:
- Why do you want to build wealth other than financial rewards?
- What opportunities would you like to have once you’ve reached financial freedom?
- Without considering how much money you could make doing it, what are your passions?
- Why are your passions important to you?
- How could you use your gifts and talents to serve others?
- What good do you want to see in the world?
Keep in mind this article is providing general information and not advice.
To protect your family and financial future against unfortunate events get personalized advice and a quote free from an expert.