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When buying property to generate wealth, keep your cool and plan carefully.

Most of us are taught from an early age to learn from mistakes. But it does not pay to slip up when you sink thousands of dollars into an investment property.

The stakes are too high and the potential losses too great. You can slide into bankruptcy simply by taking out the wrong investment loan or by buying into an area that is about to fall into decline.

According to the Australian Housing and Urban Research Institute, 25 per cent of investors sell their investment property within a year of buying it.

That’s a recipe for personal financial meltdown, pure and simple. So before reaching for your chequebook you need to take stock of the most common mistakes that property buyers make.

Taking a short-term view

You have to treat buying a property like any other investment. That means setting goals and thinking about time frames and strategy and what you can afford to spend. It’s best to hold on to a property for at least seven to 10 years to achieve good capital growth.

Many houses and units can double in value in that time but you will find prices won’t go up evenly from one year to the next. A buy-and-hold strategy protects you against these market vagaries and maximises profit.

If you opt to ”pick and flick” properties – holding them only for the short term – you are unlikely to become wealthy and you risk losing a lot of money.

Buying on emotion

Too many people buy an investment house or unit because they ”like it” or the property is a few streets from their home.

A home is very different from an investment. You select your home on the basis of your personal style and where you want to live. A capital gain is the icing on the cake.

But capital growth and rental income are everything when you buy investment property.

Think about the features that will increase rental return.

You may like high ceilings, for instance, but a tenant might not care. They will probably pay more rent, though, if there’s a dishwasher or an airconditioner.

Not the right finance

Successful investors never buy a property on impulse unless they have stitched up their finance, so loan pre-approvals are essential.

Also take time out to study how different loans work and how you should structure repayments. Offset accounts save money, reduce tax hassles and are better than redrawn home loans for investors.

Don’t leverage yourself to the hilt, either. Your loan is there to support your investment strategy, not to work against you by diminishing your own standard of living.

Doing it alone

Just as switched-on business owners surround themselves with talented consultants, serious property investors often hire experts.

The professionals to have on your team include your mortgage broker, accountant, solicitor and property manager. It can pay dividends, too, to hire an adviser to research and select investment-grade properties.

Advice that costs a few hundred dollars may save you thousands.

Managing cash poorly

Before buying it is crucial to think about tax, gearing, ownership structure and how much of your own money you will be contributing. Failed investors who are forced to sell before time are usually poor number crunchers who ”guesstimate” income and outgoings.

Seasoned investors, however, ensure they have a cash reserve ”buffer” in place. They are prepared for unforeseen expenses.


Posted by Chris Tolhurst – The Age on 3rd September, 2011