Over the last few years Mark and I have talked to 1,000’s of people who have started investing in property but have made mistakes which have cost them a huge amount of emotional and financial pain.
Now although we’ve met many ‘experienced’ or ‘seasoned’ investors at networking events who on paper looked like they were doing well, this has mostly been in a rising market, where mistakes can be disguised, rather than solid property investing strategies – absolutely vital in this market.
Property is a fantastic wealth creation vehicle, and it can give you long term financial independence if you can successfully get to grips and overcome some of the challenges that many investors face.
This short article will highlight some of the main reasons why investors fail and give you some solutions you can implement right away to succeed in your property business:
Mistake # 1 – Not Buying Under Market Value
Ok tell us something that isn’t new…Well sticking to the basics is often sooooo easy to forget that it is sometimes important to refresh our minds with the fundamentals. Warren Buffett has stuck to them for 50 years.
You are in the business of finding motivated, distressed or desperate sellers who want to sell quickly at a discount and where you can help them with their problems. Where price is NOT their most pressing concern.
Buying UMV will you give instant equity and a buffer if property prices were to fall further. It also allows you to remortgage and remove your initial deposit as soon as circumstances allow, thereby significantly reducing the risk of losing money in the short term, as you will have left none of your own money in. 0% risk on finds, infinite ROI
With this concept (which works in any market) you do not need property prices to increase in value as you are making money straight away from the discount and locked in profit
Not treating your property acquisitions as a business is a recipe for disaster. We know the old adage that cash flow is king and without a healthy flow of cash your property business will fail
Now, we are not only talking about having good cash flow properties which is essential but also having a buffer of mortgages payments and an extra for expenses, to counter interest rate rises which can put a dent in your monthly profits or if the tenant leaves and you have to fund the void periods.
What if you have an unexpected cost such as having to replace a boiler?
If you are starting out, this can be tough, we know that. However, without having cash reserves building a successful property business can prove extremely difficult
However, all is not lost. If you do not have cash reserves set aside, then perhaps you could find a JV partner who has a cash sitting in the bank [getting no interest], who can have an equity share in the property
You can become very wealthy by utilising and reinvesting using other people’s money [OPM]. Have a read of our blog post on raising JV & PI finance: http://tinyurl.com/3a44svr and become a fan of our Progressive Property Joint Venture Millionaire facebook page and hit the ‘LIKE’ button and get access to the resources: http://tiny.cc/1hpce
Remember the ‘number of properties you own is vanity, the cash flow you make is sanity and the cash you got in the bank is reality’.
Mistake #3 – Buying for Capital Appreciation [Growth] and not Yield
Many investors base their entire business model on capital appreciation and underestimate funding the shortfall in running their property portfolio. This is a very big mistake and a very high risk strategy to be avoided at all cost. It was the strategy that financially ruined many people 2001 – 2007
All things being equal, we buy our stock on the basis that property prices will never rise, meaning our model is based on instant profitability: income from rent NOT just growth. This mentality helps us make sensible decisions that the figures and the investment will provide a positive income. Capital appreciation is seen as bonus
Sure, we all know property prices virtually double every 10 years, but as portfolios grow shortfalls can become out of control if they are bought on a growth only model
Never ever buy with emotions. Remember, an asset is something that puts money in your pocket and a liability is something that takes money out of your pocket. You should be turning away more deals than you buy, making sure the yield is good, and factoring in ALL of your costs
It is imperative that you do enough research and due diligence before you buy so that you reduce and minimise the risk you are about to make
Most novice investors create the supply without the demand. There is absolutely no point (if your strategy is buy to hold, see mistake #5) buying a property that you cannot rent out.
Your local post code district within your goldmine area must be fully researched in terms of the rental market and the amount of current stock within the area. The bridge between supply and demand must be closed
Buying purely because there is a big discount is a mistake, because you will be left paying the mortgage and the operating expenses that come with holding the property. Buying property with apparent discounts without understanding comparables can give you unrealistic perceptions of actual value
Other research you should do along the way:
Is the property mortgageable? Is there any structural damage? Find compatible sold prices, instructing independent valuations, obtain recent sales and letting demand confirmation from agents, check both the Land Registry and current value prices, check LHA rates, have a schedule of any refurbishment costs that will require works, a summary of the locality of the area, transport links, demographics from government and council stats, crime rates, proximity to schools etc
Mistake #5 – Not having an Effective Investment Strategy
Investing in property is a personal strategy based on your personal financial situation, your attitude to risk, the level of funds you have to invest etc
Preparing and understanding your own motivation, goals and aims will help you with your first step and give you a structure about your strategy
For example, if you have a £50,000 worth of capital or less to start off with, then investing in HMO’s will be a pretty tough business because you probably need more upfront cash, but that does not mean you cannot invest in single let properties adopting our model of buying, refurbishing and remortgaging your fees back out
Buying a Property is easy. It’s easy to do, but it’s also easy not to do
However, buying a property that will meet and deliver on your personal strategy and your financial objectives is more of a science and one that you should familiarise yourself with
Other things to think about are how much time you can afford to put into your property business. Many people are unrealistic about the time they can afford: they think they have more or less than they do in reality. If you don’t have much time, perhaps you may need help. If you have lots of time then you probably don’t need the same seed/start up capital.
Watch out for the next 5 mistakes coming soon.