- Posted By Kate Barnett
When you’re just starting out, the world of property investing can seem a little daunting. And like anything, the longer you’re in the game, the better at it you become.
But when it’s all new and things are a little overwhelming, it’s nice to have someone who’s ‘been there before’ help guide you and share a few handy tips while you’re learning the ropes.
Firstly, it’s important to recognise that buying an investment property is only the start. Because once you’ve signed on the dotted line and settlement has come and gone, the serious business of managing that property begins.
So what do you really need to know?
The most important thing to keep front of mind is why you’re doing this.
Most commonly, people invest in property to make a return. Some simply like the security of property over more volatile or complex markets like stocks (there’s a reason the expression ‘safe as houses’ caught on!), while others are looking for tax benefits or capital growth to fund their retirement or future lifestyle.
Although the reasons vary, the number one goal for any property investor should be to protect their asset (and not lose money on it!).
As experienced property agents that really have ‘seen it all’, our goal is to help you achieve incredible returns and see your investment grow, minus the rookie mistakes.
So here’s our insight into four of the most common property investing pitfalls - and how to avoid them.
1. Is Becoming Debt-Free Always Best?
Why paying down ‘good’ debt too fast can actually hurt your hip pocket.
For many, being debt-free is the ultimate life goal. Because let’s face it, not being chained to your bank sounds incredible, and when you’re new to the investment game, generating passive income through rental returns alone does sound tempting.
But is all debt bad? Well… no.
While it’s no secret that credit cards and car loans are best paid off quickly to avoid an interest avalanche, holding onto property debt can actually benefit you in the long run.
The most obvious impact of trying to pay your mortgage down too quickly is on cashflow. Many new investors feel the need to pump every last dollar they earn into the mortgage.
Not only does this strategy mean you’ll be stressed out and miserable (baked beans on toast anyone?), it also means less free cash working positively for you in other areas.
Often, allowing rental returns alone to pay down your mortgage is the best thing you can do for both mindset and lifestyle.
However, there’s an even better reason to keep those bank repayments ticking over slowly.
Let us introduce you to tax deductions.
Put simply, deductions refer to costs that you’ve incurred while your investment property is leased, including things like advertising, gardening, pest control and repairs... and yes, you guessed it… even the interest you pay on the mortgage!
Any money you spend on these things helps lower your taxable income, which means ultimately, you’ll pay less tax, putting more money in your pocket come July!
The list of things you can claim is long and you can check out the ATO website here for a full register.
So instead of fretting about clearing property debt, use any spare cash to deal with that pesky credit card, claim as many tax deductions as possible… and let the rent money take care of the mortgage.
2. Sorry, Depreciation Who?
Why remembering to factor in this one little thing can pay off big time.
While tax deductions are a nice boost come tax time, there’s another side to the equation that’s often overlooked by those new to property investing - depreciation.
If you really want to impress your accountant, casually drop ‘depreciation’ and ‘schedules’ into the conversation. Not only will you sound like a pro, but it will start a valuable conversation that could save you thousands.
what exactly is depreciation?
Depreciation refers to the general wear and tear that your property sustains over time, and although it doesn’t incur an out-of-pocket expense, it makes a huge difference come tax time.
A depreciation schedule is a list of items that can be depreciated at a certain rate over time, allowing you to claim their devaluation against your taxable income.
Your best bet is to hire a qualified Quantity Surveyor to document and photograph all qualifying items so you won’t miss out on any valid deductions - plus, they’re likely to find things you didn’t even were eligible!
The very best time to get a schedule drawn up is as soon as your property has settled - and again if you undertake any significant renovations or upgrades - to make sure everything is accounted for upfront.
3. Where There’s No Change, There’s No Reward
When keeping the status quo can actually backfire.
To increase rent or not increase rent? That is the question.
With a (slightly different) version of this famous reference dating back to the 1600s, it’s certainly not a new dilemma. In fact, it’s one that all landlords have faced since leasing property became a thing.
But when you’re new to property investing, it can be tricky to know what to do when the time comes.
On one hand, increasing the rent means more money in your pocket. And after all, isn’t that why you got into it in the first place?
But on the other, rent increases can see your property become out of reach for many tenants. Your property may become undesirable compared to other properties if tenants feel the value just isn’t there, and you risk losing your existing tenants or being unable to attract new ones.
So how do you decide the best course of action?
When faced with the pros and cons of rental rises, some freshly minted landlords find the decision too challenging, instead choosing to leave rent unchanged, and move on as is.
But in the long run, this could prove disastrous, especially when the rental market is fluctuating, and demand is on the rise.
For instance, in a growing market, if rent is left unaltered over several lease periods, you may find that the current market price is now well above what you’re asking, and you need to put the rent up significantly to bring it back into line.
A sudden, hefty jump in rent can often shock tenants who find they are unable (or unwilling) to make this adjustment. Not only will this lead to disgruntlement, but you could quickly find yourself with an empty property.
although tempting to maintain status quo in the short term, a much more reliable strategy is to play the long game and increase rent in smaller increments each lease.
Modest $10 or $20 increases still add up over time, meeting your return goals, and you’ll find yourself with much happier tenants knowing there are no surprises around the corner - and that’s definitely a win/win.
4. Charge More, Get Less?
Why higher rents don’t always lead to higher returns.
When demand is on the rise, it’s often tempting for new investors to set a high rental price to on this growth.
It might even seem foolish not to, especially when it seems everyone’s out there making fistfuls of cash off their investment portfolio! ( alert - the media always cherry pick the most sensationalist stories).
But although there can sometimes be great returns made while demand is high, experienced property investors know this doesn’t always bode well for your overall strategy when it eventually tails off (and it will).
At best, you’ll see a high turnover of desperate tenants only signing up short-term until something more affordable comes along. At worst, your returns can be plagued long term by lower yields.
Because if you charge more than the market is willing or happy to pay, you run the risk of your property sitting empty for weeks - even months - on end.
It’s sobering to remember that several weeks without any rent at all will likely damage your bottom line more than what you’ll gain by charging an extra $50 a week, with losses adding up to more than the difference in rent had the property been occupied during that time at a lower price.
In fact, let us run the numbers:
- If you’re able to easily rent out your property for $430 per week, over a year, that equates to $22,360 in returns.
- If you up the rent to $450 per week over the same period, and successfully find a tenant to pay it, you will make $23,400 - a gain of $1,040.
- BUT if you are unable to get a tenant for, say, 4 weeks because the rent is too high, your return will only be $21,600 for the year - you lose $1,800 while it sits vacant.
In this example alone, that’s $760 lost overall because you were holding out for an extra $20 per week - crazy!
As with most things real estate, the most valuable thing you can do is get in touch with an experienced property manager who understands their local market.
They know what tenants in your area are looking for, what comparative properties are (successfully) charging, and also whether your property offers fair ‘bang for buck’ - in other words, is your property actually worth what you want to charge.
Plus, they can also advise on all the things you can do to your return, like tax, portfolio management strategies and making sure you’re always kept in the loop with the latest property market trends and changes.
But most importantly, it’s their job to help guide you safely through the property investment minefield to ensure you can achieve the best returns possible.
Embarking on a new investment journey is an exciting time, and can lead to incredible rewards if you know what to look out for - so what are you waiting for? Find yourself a trusted agent and dive straight in!
Looking for a first-rate real estate agent but don’t know where to start?
For all the very best investment property advice, why not connect with us - We Connect Property are your local property market specialists with over 21 years’ experience in buying, selling and managing property in southern Adelaide - check out our Google reviews here to find out what our happy clients think!
Just getting started, or looking for more valuable property investment tips, tricks and hints? Check out these other handy articles on our blog:
Please remember: All advice provided in this article is general in nature. To ensure accuracy, we strongly recommend seeking independent, professional advice tailored to your specific situation.