15 Apr 13
Buying your first investment property is exciting but at the same time a little scary. It means that you are prepared to take control of your own future with a solid wealth creation strategy. However, there are many traps for new investors and the excitement is often tinged with a little apprehension. It need not be that way if the new investor does their due diligence and accepts some advice from people who have sound knowledge of the potential pitfalls.
In a phenomenon peculiar to Gen Y first time investors, most of them are prepared to forego buying their own home first and are opting to live with Mum and Dad, or rent close to work, while they build their property portfolio. They reason that in seven to ten years time, the equity in their investment properties, plus the rental returns, will be a huge advantage when they are ready to buy their first home. They are taking the long-term view and ignoring First Home Buyer incentives to go for capital growth over time.
Capital Growth before Rental Returns
This focus on capital growth over rental returns is an excellent strategy. Provided the investor has the mortgage covered by yield and other income, capital growth will always outperform rental returns, especially if purchasing in a good area. It is extremely important when purchasing real estate to know how much you can afford. It is also important to have extra funds as a buffer against the unexpected, and to have the finance organised before starting to inspect properties.
Generally, buying a brand new home or apartment for a first investment is not a good idea. Capital growth can be slower in a new property as opposed to an older one in a reasonable position and in a good area. Buying the first property you see is also not a good idea. Property experts recommend inspecting at least ten properties before making a decision. This allows you to get a feel for values and locations and even though you may end up buying the first property after all, it will be a considered decision after making comparisons with the other properties viewed.
Learn from the Mistakes of Others
There are two crucial mistakes that every first time investor must avoid. If they don't put the time and effort into research they pay too much for the property, and this reduces their profit when it is time to sell. Much of the profit from capital growth comes by buying well. Overextending themselves is the other mistake that can have disastrous consequences. Holding a property for seven to eight years in most locations will deliver a handy profit when it is sold. However, if the investor has to sell because they are overcommitted, they are at the mercy of the market and may have to accept a fire sale price.
Property investment has its ups and downs but generally operates on a seven year cycle. Being able to choose the point in that cycle to sell, rather than be forced, is the key to success and will enable the investor to build wealth steadily over time.