There are a number of risks that come with investing in property and as a result, investors often make mistakes.
Being aware of what could possibly go wrong is one of the best ways to avoid getting in trouble. Listed below are just a few of the biggest mistakes property investors make.
Being reliant on low interest rates
At the moment, Australians are paying record low interest rates for their home loans. Many are taking advantage of the low repayments and paying off extra towards their mortgage. However, one of the risks investors face is that they become too reliant on these historically low interest rates and forget that there is a good chance that one day these rates will increase again.
It could only take a few months for the RBA cash rate to jump up by one or two per cent, which could increase your monthly repayments significantly. If you are not prepared for these rate hikes, you could easily be under major financial stress.
Therefore it is important to start planning for interest rate rises now. Now is the time to 'stress test' your home loan to see whether you will be able to afford higher repayments when the rates inevitably change down the track. Calculate what your repayments would be if the interest rate was one, two or even three per cent higher. You can then use the extra money to put towards your home loan or keep it as a safety buffer for when the interest rate rise.
No clear strategy
With so many ways to make a profit from property investment, it can be tempting for investors to use several different strategies at once or simply not have a solid strategy in place as there are too many options.
Investors not only need to look at whether an opportunity has potential for profit, but whether it will suit their own personal situation. For example, there may be a great development opportunity which could result in huge potential profit, however if the investor has to take out several loans to cover the costs and can only barely meet repayments, it may end up costing them more than it's worth.
This is why investors need to implement their own personal strategy that will match their goals as well as their current lifestyle needs.
Purchasing in an overheated market
If investors are too eager to buy in an area that is overheated, they could end up overpaying for a property significantly. This urgency to buy anything just to get into the market can be a costly strategy.
When the market is overheated, it is important for investors to step back and look at the big picture and stay focused on what they are looking for. Do your research about different suburbs. You may find that there are similar properties in a surrounding suburb that still has the same amenities and growth potential, but the prices are no where near as expensive.