Juliet Risdon
Juliet Risdon is a Director of JML Property and a property investor.
Having established the company in 1994, JML Property offers Investment Property & Homes. It specializes in managing properties for owners and investors, and providing attractive and comfortable homes for tenants.
There are two articles left in this series on common property investment failure, and over this week and next we cover the final eight most common and costly mistakes.
8. Gambling with the investment
Buying an investment should never be a gamble. If the fundamentals are correct, no matter what the market does you should be able to make some money.
High end property tends to fall into the ‘gamble’ category. It’s fine all the time the economy is strong, but when there is a downturn high end properties can sit empty and remain unsold for long periods.
When this happens, there is usually only one solution. Price reduction.
In addition, there are many other considerations for luxury property. For example, and beautiful sea view can be blocked by new construction.
From an investment perspective, it makes more financial sense to purchase low to middle end properties that are easily affordable to the average market segments.
7. The wrong financial structure
The two big mistakes on financing that people make are over-borrowing and under-borrowing.
Debt that can be paid comfortably by the home buyer or covered by rental payments is good debt. If you have borrowed 50% of the property price from the bank, when the property goes up in value by 10%, you actually make a profit of 20% on the money that you invested.
Over-borrowing is the biggest mistake. If you have a debt you cannot re-pay, the bank will seize the property and re-sell it. Under borrowing is not quite as serious in the short term, but having a property without any loan will hurt your long term wealth.
As a general guide, a loan of between 40% – 70% of the property value would be considered normal.
6. Mis-treating a tenant
It is extremely important to be as clear as possible with tenants.
Many investment property owners ignore tenant requests, are slow to react to problems and fail to return security deposits in a timely fashion. This creates a very bad reputation for the owner and the property that you will have great difficulty recovering from.
If you can provide the guidelines for the tenant from the start, you will have fewer headaches and happier tenants. The property will remain tenanted, and your vacancy periods will go down. It’s a classic case of the ‘golden rule’ … treat others as you would like to be treated.
This is usually the part that owners hate to get involved with and many owners opt for a management company to handle these tenancy issues. More about that later.
5. Failing to run tenant background checks
A bad tenant will make your life a nightmare.
There are tenants who could not care less about the legally binding contract they have signed. They pay their rent late, they fail to look after the property and report issues, and they leave the property overnight taking with them a good deal of the furnishings.
They hold late night parties and upset the neighbors, building managers and local neighborhood. They break items in the property, and generally put the value of your investment at risk.
Running background checks on tenants is imperative. You can nearly always avoid a bad tenant with a few careful checks, but spotting the less obvious offenders is more a matter of experience.
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