Investing in property can be a complex and overwhelming journey, particularly for first-time investors. If you are thinking about investing in real estate, one of the biggest advantages you can have is educating yourself around common mistakes to avoid.
Lack of knowledge could delay your investment process or even cost you thousands of dollars. However, most first-time property investors don’t know what they don’t know. What this means is that, often, your research reveals what issues you should keep an eye out for, but you are not aware of issues that may crop up during your investment journey. This can often lead to mistakes you could have otherwise protected yourself against.
If you are new to investing, it is critical to get tips and insights from experienced investors to increase your chances of a successful investment journey. To help, I have outlined five major mistakes to avoid when investing in real estate, based on things I have learnt over the years.
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Mistake 1: Failing to protect yourself in the contract. As a buyer, there are many terms you can put into the contract to protect yourself from a bad investment. These special conditions could be the difference between make or break in your investment journey. For instance, a special condition could be to have a pest inspection carried out before settling. You could also stipulate that the contract is subject to getting finance. Many first-time investors fail to create any special conditions, and instead, make unconditional offers which require them to pay immediately. Further, a lack of condition can leave you unprotected if something is wrong with the property.
Mistake 2: Choosing the wrong buying entity for your investment strategy. When purchasing real estate as an investment, you have plenty of options available to you. You could buy it as an individual in your own name, as a company, or as part of a trust. While each buying entity has its pros and cons, choosing the wrong entity for your strategy can lead to ramifications in the future. Start by determining what your investment strategy is. If you are purchasing to flip, buying through a trust might not be the best option as you may face restrictions around how much value you can add to the property – which limits your profit potential. In this situation, buying as a company can see you avoid Capital Gains Tax entirely, as you only pay income tax on the profits. Ensure your choice of buying entity is suitable for your investment goal.
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Mistake 3: Parting with cash before it is absolutely necessary. As an investor, holding onto cash for as long as possible can be more advantageous than having a buyer accept less money for a property, but require you to part with it sooner. You will be in a better position as a buyer if you do not have to pay the money right now. Consider negotiating an option agreement with the buyer that gives you control over the property without immediate payment. Similarly, consider an extended settlement period that allows you to start work and pay at a later date. Parting with cash too soon may find you lose funds that could be used immediately, which means you may struggle financially down the track.
Mistake 4: Misunderstanding property contract dates. While a long settlement contract can be a favourable outcome as you have control over the property sooner without spending money right now, it could become a mistake when it comes to your taxes. For tax purposes, the date is always the one on the contract, not the one on which settlement occurs. For instance, you may not settle for two years after contract signing. In this scenario, the date from two years ago is the date relevant for your taxes. As tax laws change constantly, the date is extremely important as laws at the time of settlement may not be the same as when you signed the contract. This could result in you making tax errors that could cost you thousands of dollars.
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Mistake 5: Poor due diligence. Approach investing as a business venture, where you are spending money to create a product that will earn you more money down the track. If you approach investing casually, it can lead you to get burned. Due diligence will help you confirm that all financial aspects of the deal add up. However, this extends beyond the property financial planning. It may also require you to consider zoning implications and whether the property’s title contains easements or any restrictions. It is vital that all the important questions and aspects of the property deal are reviewed and answered during this period.
When buying an investment property, it is important to take your time and conduct the necessary research. Do not let any sellers rush you in this process as it could lead to costly errors down the track. There are plenty of new opportunities to find if this property does not work out.
What mistakes have you made when investing in property?
DG Institute CEO and founder Dominique Grubisa has 25 years’ experience as a practising lawyer, debt management specialist and wealth management educator.
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