Updated: Aug 18, 2020
The purchase of a new home is always an emotionally driven one, the property has to have a distinct feel for you to fall in love. Many apply the same thinking when purchasing an investment property, with this in mind below we explain some of the mistakes that first time and even experienced investors make when building their portfolio that can limit their potential returns.
Before you even start looking at properties for your portfolio you need to understand what you are trying to achieve. Investing is something that should be done with a goal, that focus will ensure that you come out with a property that is right for you and your requirements. Separating needs and wants are important to ensure that you maximise your potential growth while ensuring you buy on the financial traits of the asset rather than the emotional factors of the equation. This is the time where you evaluate the current state of your portfolio to assess exposure and find potential gaps to fill with new investments.
When considering a home, location is key for your convenience and day to day life, it determines the shops, school zones and access to the rest of your lifestyle. In contrast, investment properties shouldn’t cater to your needs, instead be appealing yet generic for tenants while positioned in an area which is predicted to see high growth. Houses in medium to low decile areas may make for better investments due to the higher rental demand and cheaper capital entry therefore better yields. Read here for our research on how decile effects the value of property.
Buying a property purely based on yield is a solid strategy only if you understand what you are buying. Although appealing it doesn’t show potential issues that are wider in scope which is key to look at when calculating net yield. For instance, potential maintenance items, property damage, quality of the area, tenants, vacancy etc. Factors like these can impact the actual figure you may receive. We suggest neutrally geared properties, in a low to medium decile area as it allows for a more balanced and long-term strategy while still offering good return without the risks associated with negative gearing.
Owning investment properties that are appealing to both first home and investment buyers is important, but overexpose yourself in one area by only purchasing properties based on looks and how they make you feel is the fastest way to only appeal to one market. Understanding that cosmetic appeal of the property isn’t paramount for tenanting a property allows you to prioritise more important areas for tenants such as location, school zones, and transport links instead of the general cosmetic appeal of the property. Being able to distance yourself understanding that what appeals to you may not appeal to a tenant, is important to balance looks with the cost of maintenance e.g. a 1960’s weatherboard home may look nice, but it costs 3x the amount to paint than a 1980’s style fibre cement house. Over 20 years the 1960’s weatherboard home will cost $15k-$25k more in maintenance compared to the 1980’s house.
With all the talk of when to buy in the property market it is important that you understand that if you just plan to hold the property, over the next 20 years it doesn’t matter if you purchased at the peak of the current market or as it was beginning to cool. That difference in value will be made irrelevant over the years as new peaks and general market appreciation is taken into account. However, to maximise your investment making it work for you not just in the long term but in the short to medium term it is important that you buy correctly now. At Captivate we track suburb and street values across New Zealand near our largest centres to identify those areas under historical peaks that will offer not only long term gains but those in the medium term as the market corrects and a new peak is reached.
Investors who buy close to home may understand the local market well. However, they put themselves at risk when only buying in their neighbourhood. Purchasing in the same area also represents the risk of having all your investments in one area, this means that potentially if the market underperforms all your assets won’t be affected, potentially leaving you over capitalised with underperforming assets.
Some investors go with what they know, although a good strategy in some areas, over investing in a specific type of property is another very real risk. Buying too many units in a specific area, or too many three bedroom standalone homes means that you won't be in a position to be protected or take advantage if a specific property type sees a sizable change in value as you are only appealing to a limited market. Buying a diverse set of investment properties allows you to not only appeal to a larger group of buyers but also protects against different shifts in the market. We believe diversification is key to any investment and owning three $300,000 homes with one in Hamilton, another in Wellington and the last in Christchurch is less risky than owning one $700,000 home in Auckland.
Under-Estimating Renovation Costs
Before buying a property that requires any kind of renovation, it is key you know of the works true value and the extent of which you are going to renovate. Over renovating and underestimating the costs associated, makes for blown out budgets with poor return on investment. Knowing which areas effect rental value is also important ensuring that you maximise returns and the quality of life for your tenants while keeping yield intact. Construction and renovation today more than ever brings liability and risk, with health & safety and potential quality issues should anything go wrong if you sell the property earlier than expected. DIYers although have themselves as free labour, the prices paid for materials are still more inflated compared to that of trade pricing. This is because of the volumes those in trade buy, good relationships and access to wholesale distributors meaning that all in it could still be cheaper and easier to buy a renovated house compared to one that requires you to do the work.
Investing in property is not as simple as it appears on the surface. It is important that you are self-aware when it comes to your impulses and are able to let them go to achieve the best returns for your portfolio. Discussing strategies with our team will help you see the bigger picture to help you avoid the most common mistakes that do it yourself investors often find themselves making.