Seven common examples of poor property investment decisions
GUEST OBSERVATION
If there is one thing that I see on a daily basis that I get frustrated with it is that decision-making is a skill which few people have learned to do very well. And this, not one's salary or profession, is the primary reason why few people achieve anywhere near as much as they are truly capable of.
When taking on important projects, a lot of people's focus is too heavily weighted on how they can complete it at the lowest cost rather than focus on the outcome that they hope to achieve.
Good decisions are made with a clear mind and with a focus on 'why' you are doing it in the first place – the long-term objective as opposed to the current task. Tapping in to the best resources you can find, including input from someone whose core business is conducive to your longer-term objective, enhances decision-making quality. Regularity of good decisions is the cornerstone to success.
Getting something done is an accomplishment. Getting something done well is an achievement! Many people can lay claim to the accomplishment of buying a property. Fewer people have truly astute investment decisions on their list of achievements.
Those whose default behaviour is to save money ahead of doing something as well as they can are destined to compromise outcomes. We've all heard that saying "you get what you pay for". The first question that people ask when making enquiries about goods or services is "what does it cost?” when it should be “how can you assist me to achieve my objective?”
The client who appoints the accountant because he/she is the cheapest will never know that there were more creative strategies which would have saved them a lot of money.
I find it amusing when people chose to take that DIY option instead of paying a specialist.
Outsourcing to specialists creates more time to do more of the things that you are truly good at, enables you to make more money, and enhances the quality of your accomplishments.
The person who uses a DIY diagnosis for that constant sneeze and keeps going back-and-forth to the chemist, might have been able to overcome it very quickly from a trip to an allergy specialist – skill comes at a cost but the net result is usually worth it. A majority of property investors are like that DIY patient who never consults a true specialist!
There are only 24 hours in the day; it's what we do with them that counts! We can all make more money if we really want to but no one can make more time. No one!
If we want to achieve the very best that we are capable of for something that is important enough to do, then I suggest that's where the focus should be most, not on the easy option or the cost.
Instead of focusing on tasks associated with buying an investment property, focus on the primary objective of increasing your potential to make the most money possible. Are you a ‘property buyer’ or a ‘property investor’?
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Seven common examples of poor decision-making made by property investors:
- Property selection
Tax advantages and emotions dominate property selection decisions to the detriment of capital growth potential over the longer term. Hardly a day would go by without me hearing someone tell me that they want to buy a brand new property because of the extra tax incentives; or an attractive looking property to get a better tenant.
A structurally sound established property, in a strategically chosen location, at a significantly lower entry-price has much more upside capital growth potential, whether it looks dated or beautiful. - Building and pest inspections
Why are some buyers so quick to terminate a purchase contract after an inspector discovers defects?
The inspector’s job is not to comment on what they like; he / or she is only going to comment on the 1-2% of the property that might benefit from some best-practice attention.
The long-term primary objective is to invest in a property in the right city, the right street, the most suitable dwelling style, and priced right. If you’ve already found that property and it happens to have several defects why would you be so keen to walk away?
Good decision-making would be to explore how significant the defects are, the likely cost to fix them, and whether a deal could be done with the owner. What most see as risks, could actually be opportunities.
- House v apartment
I wish I had a dollar for every time someone told me that they “don’t want to invest in an apartment because they don’t want to pay body corporate fees” or “land appreciates but buildings depreciate”. Narrow-minded statements such as these are living proof that too often people get distracted by small things which they don’t want at the expense of the real objective, the end result that they hope to achieve.
The dwelling types within my own property portfolio have been strategically-chosen as a result of demographic and supply-demand research conducted within each city.
- Applying for an investment home loan
The objective should be to get the most suitable type of loan, which compliments a professionally designed overall debt structure, has a strategy to deal with good debt and bad debt, and avoids cross-collateralising. In spite of this, the first question people usually ask is “what’s your interest rate?”
A lot of borrowers are also creatures of habit who go back to the same bank because ‘it’s easier’. Banks are good at explaining features and benefits however their strategy skills generally leave a lot to be desired.
- Property management
Property managers play an important role in helping investors to get the best out of their profit and loss statement. Why is it the first question investors ask is “what do you charge?” This is a classic example of how so many people lose sight of the primary objective - property management fees are only one line entry in the P&L.
When I interview property managers I enquire about office systems, staff turnover and ratios of properties to property managers. I ask questions about their processes to minimise vacancy periods and arrears, how they handle maintenance requests and I review samples of their rental advertisements.
As with a majority of business decisions, it’s not so much as what a property manager charges, but what they do (or don’t do) for it.
- Organising insurance
The point of having insurances is to protect ourselves from loss in the event of an unforeseen event. The focus should therefore be on what needs protecting, how much protection we need, and what the policy wording says that the insurer will / will not do in certain situations.
When organising insurance, an overwhelming majority of people do little more than ring around and ask price-related questions (“what’s your premium, what’s your excess?”). How would you feel if a claim for flood or malicious damage was denied, or the payout following a major fire was insufficient to rebuild the entire house?
If the insurer doesn’t come to the party at time of claim all of those insurance premiums that you’ve paid over the years are little more than a donation.
- Rental renewals
Refusing to be flexible with the amount of rent charged without even contemplating current market forces is another example of poor decision-making which is all too common amongst property investors. What is the sense in insisting on a particular rental figure at the expense of a longer vacancy period? It is irrelevant how much rent you ‘want’, or how you justify it, unless the market is prepared to pay it.
Astute property investors make good decisions through understanding that there are generally three factors which determine whether or not a property is rented: price, presentation, and promotion.
Every market’s vacancy rates will fluctuate up and down from time to time and sometimes the best decision is to advertise the property for 5% less than your competition. 80% of something will always be more than 100% of nothing!
Simon Pressley is managing director of Propertyology, a full-time property market analyst, accredited property investment adviser, and Australia’s (REIA) Buyer’s Agent of the Year (2012+2013+2014)
