Five mistakes to avoid when getting into property investment

Posted by Andrew Nicol on 22/05/17

Property investing is EASY. Even a monkey could do it.” That’s what we hear time and time again from would-be investors or those who’ve just started out. It’s true that anyone with the required capital can buy an investment property in New Zealand (although probably not a monkey), but being a successful property investor is a whole different story. Here are some of the most common mistakes we see new investors making. Any of these mistakes could cost big time.

Mistake one: Buying based on emotion

“We loved the house instantly, so we bought it.” “I decided to buy the house I grew up in as an investment.” “We wanted to give a new family a beautiful home.”

Buying a rental property requires a different thought process from buying your family home. Too many people choose a property for the wrong reasons – they personally like it, or it has sentimental value – instead of looking at the practical aspects of property investing. The question you should be asking when looking at a potential property is: what is the net yield? If you don’t know the answer, you have a LOT to learn about successful property investment.

Mistake two: thinking about the rewards instead of the strategy

A friend of a friend told you they made $300k through investing, and the next thing you’re combing the listings with dollar signs in your eyes. There is a lot of money to be made in investing, but that money goes to the investors who think strategically about their portfolio, not those who jump in just because they fear missing out on the gravy train.

Mistake three: You should take all the money the bank throws at you

Banks lend a high proportion of a property’s value, meaning the leveraging is superior to many other forms of wealth generation. However, this comes at a cost to unwary property investors. If you’re trying to build a portfolio of 5-10 properties, then you’re going to be borrowing a substantial amount of money. You need the cash flow to continue to borrow. Borrowing too much can land you in trouble, especially if the market suffers as it did during the Global Financial Crisis.

Several high-profile investors went under when banks tightened up their lending. Banks calculate their numbers differently from you. They factor in four-week vacancies, 25-year home loans, and a lower rental rate. What looks like a great buy to you can prove to risky for the bank, and if you’re not careful, your property empire can be stalled before it’s even begun.

OPES can help you navigate gearing and figure out your best strategy based on what the bank will lend. Talk to us before you make any decisions and we’ll help you choose the right lenders for your situation.

Mistake four: thinking too narrowly about property investment

You don’t have to buy a house in order to make money from property. You could:

  • Invest in commercial property. The cost to get started can be higher than residential, but there are significant rewards, and it’s often not as competitive.
  • Buying shares in property investment companies. This is a hands-off way to take advantage of the property boom, and doesn’t involve you taking out lending.
  • Buying shares in a managed fund which invests in property. Most growth funds will have a percentage of funds in property, and there are also specialised funds that focus on property.
  • Forming a syndicate or partnership with friends, family, or acquaintances to buy property.

The team at OPES can help you figure out which options are right for you.