Real estate investment is fraught with potential pitfalls. But how can you avoid them and minimize your risks?
Since 2003, Wayne Jessup has been helping Australians successfully invest in their future under the banner of The Property Bloke. He has been very involved in real estate since his teenage years, looking for the best ways to build a portfolio and stimulate both earning potential and overall growth.
"I started reading about investment property at a fairly young age – around 16 years old – and I decided that was what I wanted to do with myself" says Jessup. "I then bought my first investment property at age 18 and started working in the industry more formally a few years later. Since then, my goal has been to help people invest in real estate to secure their financial future. »
In her daily role as The Property Bloke, Jessup is passionate about people who avoid the potential pitfalls of real estate investments. During his time in the industry, he saw many investors make mistakes and even learned from some of his own. He has compiled some of the most common ones here and explains how to avoid them.
1. Error n ° 1: Structure of the loan
"The most important thing I see regularly is probably that investors are wrong about their lending structures and are not setting up their loans correctly," says Jessup. "People don't realize the tax benefits of certain loan structures and how they can be if they are misconfigured; they can be very difficult to break up and restructure."
Jessup quickly clarified that the loan structure is not the type of property, lender or bank – these are the actual conditions of the loan described in the contract.
"People have a wide range of opinions on this. Some people who have money think it's good to pay that money on the property and have it as a redesign, but that affects the tax deductibility of the loan, "says Jessup.
On the other hand, he suggests that having a compensatory account is the best option, because the money is always accessible without affecting the tax deductibility of this investment loan.
"On a regular basis, I see people having a financial windfall – perhaps through redundancy, for example," says Jessup. "So they pay money from the investment property, but they may want to use it to move to a new house or car, and the tax deductibility of this loan investment is just gone now. "
This can end up being a significant problem, which can lead to other problems along the way, notes Jessup.
"They have a big problem, and in some cases, they have to sell the property to regroup and buy another property," he says. "Not to mention that this will lead to capital gains problems – and if you sell a property unexpectedly, you may not have the best opportunity to take advantage of broad market trends. It’s is a far from ideal situation. "
2. Error # 2: ownership structure
The ownership structure is crucial, whether you are a first-time investor or own 10 properties, says Jessup.
"It depends on who wants the property," he says. "Whether it is you personally, you and your partner jointly, or the transfer of ownership in a business, a real estate trust or any other type of structure, you must ensure that you seek advice beforehand."
Once you have bought a property, explains Jessup, it is difficult to change owners without going through a heavy administrative burden. You will have to sell the property, which involves a whole series of complications.
"You have to be smart about how to minimize your spending," says Jessup. "Sometimes you have partners who earn a lot more income than one or the other. From a long-term tax deductibility perspective, the property should probably be in the name of the higher-income earner. Conversely, if you plan to return the property within a relatively short period of time and are looking for a favorable capital gains situation, you want the property to be in the name of the owner with the lowest income. »
It's a similar situation when you buy in a company or a real estate trust structure, says Jessup. Careful consideration is required beforehand to maximize the potential benefits.
"If you plan to move your money with a business, rather than taking it and putting it into your own personal finances, you will only pay a maximum of 30% tax," explains Jessup.
"So you can potentially have a lot more money to invest in the next property, development or subdivision – whatever you decide to do."
3. Error # 3: copying someone from another
Jessup cautions against copying other investors in an attempt to "follow the Joneses". This can cause serious financial turmoil if you are not prepared or if you decide to make a purchase based on emotions such as jealousy.
"Copying someone who has different financial circumstances from you can put you in a very bad financial situation," says Jessup.
"So it's not because a family member or friend bought an investment property that you have to do it. I'm not saying it won't work for you, but I say you need to take a serious look at their financial situation compared to yours. You may need a different plan of attack in your own situation. "
People can also get carried away by the idea that a place where they would like to live is also a good place to invest.
"Throughout 2020, we plan to do a lot more work on loan structures, affordability and loan comparisons"
"Many places you want to live in are not good for investing," says Jessup. "So keep that in mind when you are also considering shopping for someone else – don't be led."
4. Error n ° 4: Not enough research
There are many types of properties available in the market, but not all of them are suitable for you. Jessup compares it to a "funnel of opportunity" and warns that potential investors should look for something that meets their specific needs.
"We are very committed to education at The Property Bloke," says Jessup. "So we make sure that you are fully aware of the style of real estate investment that you should buy."
There are several contributing factors, he notes. Age, personal financial goals and current income, as well as various other factors, are all contributing factors.
"The lending criteria are now more difficult than they have been for a long time, and it appears that they will remain so for the time being," says Jessup. “Throughout 2020, we plan to do a lot more work on loan structures, orderability and loan comparisons. Investors should make sure that they do their due diligence well in advance. »
"The criteria for granting loans are now more stringent than they have been for a long time, and it seems likely to remain so for the moment"
In terms of time, Jessup suggests examining the properties three to six months before the scheduled purchase date.
"Investors should do education and research six months after the time they want to buy," he says. "We see a lot of people who wake up one morning and say, 'I want to buy an investment property today'. But this is not how it works; it is a longer process and you need to educate yourself and determine the ownership criteria that suit you well in advance. »
5. Error no. 5: FOBO
Originally invented by US venture capitalist Patrick McGinnis, FOBO – or "Fear of better options" – is a common problem for many potential investors, says Jessup.
"FOBO is a paralysis of analysis", he explains. "It's basically a bunch of procrastinations where you think you're always going to find a better property than the one you're looking at today."
But if you've done your research on the area and find a property that you think meets your criteria, Jessup says you should probably go there.
"Every time you look at it, it will cost more," he says.
"You're going to miss the vouchers and you're going to end up buying something you don't want. This is the biggest problem I see with people dithering."
"The sooner you start investing, the better. I'm trying to get people to start as young as possible "
Jessup indicates that one of the biggest risks is actually missing out on potential growth and income from this real estate investment.
"What I regularly see from investors is that once they have finally set up this first property, we very much regret that they did not have not started earlier, "he said.
"So the sooner you start, the better. I try to get people to start as young as possible. At 18, when they have a good job, I encourage people to start saving money. You will not regret buying a good solid property as soon as possible in your financial scenario. »
ABOUT THE PROBLEM OF OWNERSHIP:
Investing in real estate can be a confusing process. However, if you are planning your real estate investment purchase to achieve your long-term goals and financial situation, real estate investing can be an enjoyable experience with great returns.
Property Bloke is your personal real estate investment coach, helping to facilitate the real estate investment maze. The Property Bloke is your mentor, coach and real estate orientation expert, offering a personalized approach to educate and empower you so that your investment achieves a desired lifestyle outcome for you, your family and your future. Whatever the reasons why you invest, your studies begin with Property Bloke.
WANT TO LEARN MORE?
To learn more about how The Property Bloke can help you navigate the real estate investment maze, visit: www.thepropertybloke.com.au