5. Conned By A Sob Story
As hard as this may seem, when you own an investment property you own a business. You are in the business of exchanging accommodation for money. It costs you money to provide that accommodation.
You have rates and taxes to pay on your property. You probably have finance costs to pay in the form of interest on a loan to a lender. If something goes wrong in your life, you still have to pay your expenses.
The same applies to your tenants. If something goes wrong in the tenants’ life, the tenants are still liable to pay their rent. Sometimes, however, some tenants will approach the owners of properties with some heart-wrenching stories. They will offer compelling reasons why they cannot pay their rent. You must not be swayed. You are not a charity. It is not your job to provide welfare for your tenant. If the tenant gets into financial difficulties – for whatever reason – the tenant should seek help from sources other than the landlord. Too often too many landlords get ‘taken in’ by sob stories.
Some landlords get conned out of several weeks rent before they realise that the sob story was just a ruse not to pay rent. So, remember, as a property investor, you are a business person. You are not cold hearted, just realistic and sensible.
6. Sudden Captial Loss
Most property investors fail to make financial allowances in their budgets for capital costs. Suddenly, they need a new roof on their property which costs several thousand dollars. Where are they going to find the money?
When you buy an investment property, you should always make an allowance for the expenditure of capital costs during the life of the property. Many investors make the mistake of thinking that capital costs can be claimed under insurance. Insurance only covers loss or damage, not wear and tear. If the gutters rust out, the cost of new guttering is a capital cost. While it is usually tax depreciable, it’s not tax deductible and the money needs to be found immediately.
To soften the blow of sudden capital costs (and prevent them from becoming a disaster) try and set aside a certain amount of the rent in a special account set up to provide for capital costs. If you don’t have enough money from the rent to cover capital costs, at least set up a budget for a future date so that you know when these capital costs are likely to occur. If you are considering buying a property, that’s the best time to analyse your likely future capital costs.
The older the property the more likely the chance of larger capital costs happening sooner. The newer the property, the better. Of course, you are going to have to pay a higher purchase price for a newer property. Just remember, though, it can often be false economy to buy some ‘cheapie’ investment properties. Capital costs can be disasters.
7. Failing to Learn
You’re going to make a lot of mistakes as a property investor. Just be sure that each mistake is seen as a learning experience. Don’t make the same mistake twice. The worst types of property investors, those who are prone to the most disasters, are those who fail to learn from their mistakes.
Be careful of so-called ‘property experts’, those people who claim to be able to teach you the ‘secrets’ of property investing. There are no secrets and anyone who tries to sell you “secrets” is probably a crook.
Property investing is quite simple. You buy a good property in an area with good growth prospects; you check your finances and make sure that you can comfortably afford the property; you find a good agent who finds a good tenant who looks after the property for you. You check with your accountant and lawyer to make sure that you are safe financially and legally. You check with your local agent to make sure that your property can be rented for a good return.
All the time you learn as much as possible about the investment process. You never stop learning. If you’ve bought the wrong sort of property in the wrong area, then don’t let this turn you off property investing. Learn from your mistake. Get it right next time.
8. Investment Disaster
Okay, so you got conned. You bought a property off-the-plan and when it came time to settle, the property was worth a hundred thousand dollars less than you paid for it. A disaster. You bought a property with a ‘rental guarantee’ and when the guarantee ran out, the rent dropped by five hundred dollars a month. A disaster.
The property industry is riddled with property spruikers. Thousands of investors have been caught. They have bought properties that are worth far less than the price they paid for them. In most of these cases, investors pay around 30 – 50 thousand dollars too much for their investment properties. In addition, investors also fork out around 10 – 20 thousand dollars in legal and purchase fees. This means they are instantly facing a loss of close to a hundred thousand dollars. These days, many accountants and financial planners are selling properties on behalf of developers. In almost all such cases, these properties are grossly over-priced and investors are buying an investment disaster.
If you are approached by any company that claims to be a property ‘expert’ or a property ‘club’, be very careful. You are almost certainly being set-up to buy a property from a property developer at an over-inflated price. An investment disaster.
The best and safest property investment you can often make these days is to go to your local real estate office and look at the selection of local real estate available in a local area. Real estate agents usually sell real estate at fair market value. They are rarely involved in the notorious practice of ‘two-tier’ marketing where investors are sold properties at inflated prices. Investment properties bought from local estate agents are seldom investment disasters.
9. Sell Out At A Loss
Sometimes, with some investors, their property disaster is so bad, they feel they have no choice – they are forced to sell out at a loss. There are few things worse than buying a property for $630,000 and selling it for $390,000 (a true case of someone who bought through a ‘club’).
It can turn you off property investing for life. But don’t let one disaster ruin what can be a lucrative investment for you. If you invest in the right place at the right time in the right property, you can do very well with property investing. So, if you sell out at a loss, try to tell yourself that, one day, you will invest again, but do it properly. You will do your research, you will check property prices with local agents, you will interview local agents about rental returns. In short, you will almost become an expert before you buy. Yes, if you are forced to sell out at a loss, you will vow to buy back later and make a profit.
Of course, you can always try and hold on and see if today’s disaster will improve tomorrow. Be careful, though, because bad property investments rarely become good property investments. Most times, when you are faced with the fact that you have got yourself stuck with a dud property, the best thing you can do is cut your losses. Lick your wounds. And then come back and fight again another day.