The biggest avoidable mistakes of property investing?

Establishing an investment portfolio holds some great opportunities for growing wealth. At Solace Wealth Management we also have a thorough understanding and appreciation for the risks involved. 

We decided to put together a great read on how you can avoid common mistakes of property investing.

Some common financial goals are:

• Reduce debt,

• Build and protect your wealth

• Buy an investment property, or

• Manage your budget better and save.

We put a plan in place to help you achieve those goals. A good financial adviser will be able to create a tailored plan that suits your individual needs as they will already have a good understanding of not only what is important to you, but what you’re comfortable with.

 A good financial plan should help you sleep better at night.

The biggest mistakes in property investing

The biggest mistake I see new property investors make is that they come to see me too late into the process. This point is of particular importance for those who want to turn their current home into an investment property and buy their dream home to live in.

This is a very common strategy as a lot of first homeowners will buy whatever is affordable to get into their first home. After a few years they have built up equity and are starting to think about upgrading. Equity is the difference between the value of the house and the balance of the loan. Equity can build up by either increasing the value of the home or reducing the balance of loan.

If we then turn the existing property into an investment and purchase a new home to live in, we will be drawing out some of the equity of the existing property as a deposit on the new property. 

The downfall here is you now have an investment property with low tax-deductible debt and your primary residence with high non tax-deductible debt.

The second most common problem I see with this strategy is where first home buyers have completed renovations on their home to build equity and they have over capitalised on these improvements which add little increase to the potential rental income. 

How can these problems be avoided?

These mistakes can be easily avoided by applying a few key tips:

1. First and foremost, plan early. Before you buy your first home, make plans for what you would like to happen down the track.

   • Would you like to eventually sell it to buy your dream home?

   • Is your first home your dream home and you’d like to buy a second property in the future as an investment? Or,

   • would you like to turn your first home into an investment property and buy your dream home to live in?

2. Secondly, loan offset accounts enable you to use your savings to reduce your interest expenses without impacting the loan balance. This means that funds can be deposited and withdrawn from the offset account without the purpose of the loan being impacted. It means you’re using extra cashflow to build your savings rather than reducing debt. If you aren’t sure of what you want to do with the property in the future, offset accounts give you more flexibility to reduce your interest expenses while you make decisions.

3. Thirdly, consult an experienced real estate agent who understands what adds value to an investment property. A highly experienced agent should be able to tell you what property features or renovations will help improve your rental income and those that won’t.

4. Lastly, most people have heard of keeping tax-deductible debt high and reducing non tax-deductible debt. The tricky part is understanding what makes debt deductible and non-deductible. It is vital to forward plan early in terms of what you would like the asset and debt to become so you don’t make preventable mistakes now which impact the deductibility in the future.

For an investment strategy to be successful, it is absolutely vital to have an experienced team of professionals around you. An experienced mortgage broker in investment lending will understand loan structures and the importance of ring-fencing deductible debt. An experienced real estate agent will be able to provide guidance on maximising the value and rental income of an investment property.

If you are thinking of starting your Investment Portfolio feel free to get in touch for your free initial complimentary consultation - 0423 313 486 or kate@solacewealth.com

Kate Trost

Senior Financial Adviser and Director of Solace Wealth Management (AR numbers 465078/1262350)

Authorised Representative of Avana Financial Solutions (AFSL 516325).