What strategies are not always suited to new investors?
Everyone has a different appetite for risk when it comes to investing, with individuals having a unique profile of their experience and knowledge.
For new investors, that first purchase can be critical as one of the initial building blocks to a larger portfolio.
While inexperienced investors may make more mistakes, or to purchase something in a slow growth area for the long term, there are some strategies that are unlikely to suit those with little capital, lots of potential and little expertise.
Many risky strategies centre around behaviours and choices that amount to speculation or quick-rewards type thinking.
Here are some of the strategies to be careful with:
Mining town or single economy regional towns
Mining towns can leave even the most astute investor flailing. Known by even those outside of real estate circles for their volatility, the towns are seen to be attractive due to their regularly lauded ‘hotspot’ titles.
"So what madness is this that causes property investors, many of them without money to lose and gambling the equity in their own family homes, to completely ignore the risk factor attached to buying in mining towns?" asks Destiny Financial founder and director Margaret Lomas.
Quite simply, she says, investing in a town solely based on just one industry carries a risk greater than buying a property in an area with a diversified industry.
"An event that may initially have little to do with that one industry, such as another GFC, a slowdown in China's demand for our resources, to name a couple, could eventually develop to create an impact great enough to negatively affect the fortunes of the true risks involved," she warns.
Structural renovations or development projects
Some new investors will suit these projects, however the majority will not have a background or the experience necessary to successfully undertake a large project without substantial help.
Not only are the costs significant upfront, but the time it can take for these improvements to get off the ground can be lengthy.
First timers may want to consider cutting their teeth on more traditional investments, or smaller improvements such as a granny flat, subdivision or cosmetic renovation before jumping in for more substantial and costly improvements.
Low or no deposit options
If you are being offered a way to get into a property without having saved a certain amount, you should be on your guard about the terms and conditions. Without building in a substantial buffer to the mortgage, you are putting yourself at risk if the market dips even slightly.
Loans that fall into this category, including family guarantees, 40-year loans and low-deposit loans, can be used safely by investors, provided they plan and research carefully.
This includes doing a ‘pressure test' – see if you can afford interest rates if they increase by say 3% or more. If you're thinking about a family guarantee, then ensure you consider alternatives and the consequences, and that everyone impacted is aware of the potential outcomes should the owner default.
And, of course, ensure you have enough savings to cover things if problems arise.
Joint ventures
Purchasing an investment with a friend or family member, or a number of them, can help you get into the market with less upfront capital sooner.
This is much easier when the parties enter into the transaction 50/50, splitting every cost and responsibility down the middle. However, it is not unheard of for someone to bring more capital than another investor. This can then cause arguments around who is entitled to more of the profits and week to week cash flow.
However, while they can be done successfully, joint ventures or "JVs" can also bring a whole new raft of risks with them. What if your situation changes, and you want to sell but the other parties want to hold? Who is responsible for what repayments, and what happens if they default?
While you take away some of the upfront responsibilities, you may also find yourself taking on their troubles with the investment while losing control over the asset. Ensure everyone knows what they are required to do, which costs and maintenance they should be assisting with and have a good system in place to deal with conflicts.
To do this well, have a lawyer write up an agreement between the joint venture partners, clearly outlining responsibilities, costs, and what happens when/if capital gains are realised before you enter into the investment.
For help getting started in property investment, speak with a RAMS home loan specialist and pick up your free RAMS Investor Pack.
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Disclaimer: Information in this material in general and does not take into account your objectives, financial situation or needs and you should consider whether it is appropriate for you. You should also obtain independent professional advice relevant to your financial circumstances.
The taxation positions described are general statements and should only be used as a guide. It does not constitute tax advice and is based on current tax laws and their interpretation.
RAMS Financial Group Pty Limited does not endorse or assume any responsibility for the advice, content or services provided by Property Observer or any other third party referred to in this material.
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