Avoiding the traps

08 Jun 2015| Posted by: Geoff Baldwin

Like anything we do in life, property investment does have its share of pitfalls. Let's now have a look at some of these and how we can avoid them. By far the biggest of these is financial over-commitment Property investment can be very profitable however when starting out, it may pay to be a little conservative. Many “first timers” have soured their experience by buying too much too quickly and hence, placing themselves under pressure. One of the positive points about property investing is that it forces us to commit a part of our income into an appreciating asset. It is important though, to be sure that you can handle the commitment no matter what else happens in your life. What about interest rates? Well, if they're down they can go up and if they're up they can go up! The recommended financing method is to use fixed interest loans whereby you pay only the interest. This allows you to concentrate on paying the mortgage on your own home, optimises your tax relief and gives you the security of knowing your interest rate cannot rise. Of course you may choose to take advantage of a low variable loan now and take the option to fix should interest rates look like rising in the future. The fear of vacancies The worst vacancy factor in Australia in the past 20 years has been 9%. In other words 9% of properties were vacant but importantly, 91% were occupied. The fact is that, those properties that present well and where a reasonable rent is being sought will always be tenanted regardless of the state of the market. Buying in the wrong location is a trap that catches many purchasers, investors and owner-occupiers alike. Usually, the only attraction for badly located properties is the lower price being sought. The first problem is that tenants do not want to live in undesirable locations and when it comes time for you to on-sell your investment, you too will have to accept a lower price. Speculation. Many new investors are attracted by the thought of speculating in property but it is important to remember that speculation is short term and high risk, while investment is long term and almost risk free if simple rules are applied. The successful speculator usually works full time in property, buying improving and then reselling. These people will usually have a large bankroll and do not have to rely on rental income. Property speculation is a specialised field and in essence, provides a full time job for those involved. ON the other hand, property investment does not require a huge ongoing commitment in money or time. Suffice to say, any of these traps can be avoided with adequate preparation, planning and thought.