What Are The Biggest Mistake Property Investors Make?
Updated: Nov 11, 2022
Source: Property Investment – The 5 most common mistakes to avoid, https://blog.hashching.com.au/the-5-most-common-mistakes-to-avoid-when-it-comes-to-property-investment/
The biggest mistake I see property investors making is succumbing to greed and committing to properties beyond their financial capability. This often happens during bullish markets when buyers aggressively bid for properties, and many investors boast of the huge profits they make by flipping or reselling properties.
I have come to know some of my current clients who over-committed to properties by themselves with other property agents before me and when prices fall, they sold off some of the properties at depressed prices. Worse still, some of them actually defaulted on their commitment to pay the mortgage installments. Lessons learnt by them is never overstretch your financial capacity, but only what you can afford to hold. You must have the financial capacity to ride out the storm in a weak property market, and be prepared to hold on to your property for a few years. Make sure you set aside enough money for the incidental costs such as stamp duties, legal costs, etc) and have a 12 months worth of funds to roll as cashflows. In fact after talking to all the seasoned property investors, they really appreciate what I have shared with them in terms of cashflow management in property purchase as well as safety net analysis.
I have also often been asked many times whether residential or commercial properties make better investments. My general assessment over the years is to buy residential properties for capital appreciations and rental yields, commercial and industry properties for rental yields only. But do take note that residential properties are in the tenure of either Freehold, 99 years or 999 years, while commercial and industrial properties are in the tenure of either 30 years or 60 years. And the loan criteria and loan tenure are also different between residential and commercial or industrial as well as the stamp duties and taxes are also different.
IF YOU ASK ME WHAT IS MY PERSONAL INVESTMENT PHILOSOPHY?
I can never over-emphasize the importance of financial prudence. In my network, we carry out what is known as the "stress test". We will ask ourselves or clients whether we are able to comfortably pay our monthly mortgage installments in a worst case scenario when interest rates skyrocket and mortgage installments increase. To make matters worse, our tenants may leave and a suitable tenant may not be found easily. Rental payments are not always dependable and we may have to go without rental collections for months on end.
Currently I would allocate half of my investment funds to a property and the other half is invested in financial instruments such as fixed income instruments, dividends stocks, unit trusts etc a good mixture of both liquid and illiquid investment portfolio. Every now and then I will set trigger points to re-balance my own portfolio of investment to hedge the risk against the market chages. I would also usually advise my clients to find out more about themselves and I will also guide and advise them along the way on the analysis for their property investments and of course get them to listen to the advice and recommendations of the experts in other fields such as the private bankers and stock brokers as well.
Brian Loh CN
MSc. Applied Finance, University of Adelaide, Australia
Registered Real Estate Salesperson by CEA Singapore