Investing in property is one of the best ways to generate multiple streams of passive income. Every day investors from all backgrounds are switching to investing in assets rather than savings. The Progressive Property co-founders have invested in hundreds of successful properties over the past decade and now teach their skills and techniques to the next generation of property investors. Yet there are plenty of property investment mistakes people make along the way. Here are our TOP 16 property investment mistakes you’re making and how you can avoid them.
TOP 16 property investment mistakes
Not Buying Under Market Value
Ok, but we bet you’re thinking “tell us something that isn’t new.” Well sticking to the basics is one of the easiest property investment mistakes to make. So sometimes its important to refresh our minds with the fundamentals. Remember people like Warren Buffett have stuck to them for 50 years
You are in the business of finding motivated 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 Under Market Value (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 return on investment (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
Underestimating the importance of cash flow
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 mortgage payments and an extra for expenses. This is 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 any cash reserves, building a successful property business can prove extremely difficult and is one of the fundamental property investment mistakes people make.
However, all is not lost. If you do not have cash reserves set aside, then perhaps you could find a Joint Venture partner (JVP) who has a cash sitting in the bank, earning virtually 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. Have a read of our blog post on raising JV & PI finance on how raise Joint Venture finance.
Remember:
- The number of properties you own is purely vanity
- The cash flow you make is sanity
- The cash you have in the bank is reality.
It is important the remember those 3 factors when working with your property portfolio.
Buying for Capital Appreciation (Growth) and not yield
Many investors base their entire business model on capital appreciation (growth) and underestimate funding the shortfall in running their property portfolio. This is one of the biggest property investment mistakes 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. Growth is seen as a 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.
A big property investment mistake: Not doing enough research
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 buying a property that you cannot rent out. If your strategy is buy to hold, see property investment mistakes number 5.
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 to avoid any property investment mistakes
On top of your basic research, you should research the following topics to avoid any more property investment mistakes:
- Is the property mortgageable?
- Is there any structural damage?
- Find compatible sold prices. Remember the 6 in 1 rules. Check houses prices for comparable houses that have sold within 1 mile of the property you are interested in within the last 6 months.
- Instructing independent valuations
- Obtain recent sales and letting demand confirmation from agents
- Check the Land Registry and current value prices
- Check LHA rates
- Have a schedule of any refurbishment costs that will require works
- Produce a summary of the locality of the area, transport links, demographics from government and council stats, crime rates, proximity to schools etc.
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.
Example: if you have £50,000 worth of capital or less to start off with, then investing in HMO’s will be a pretty tough business because you will probably need more upfront cash. But that does not mean you cannot invest in single let properties adopting our model of buying, refurbishing and re-mortgaging 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. One of the most common property investment mistakes many people make is being 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.
Over killing on the Refurb
If the property requires some sort of renovation, do the bare minimum. Do not get drawn in by those magical makeover TV programmes such as Property Ladder or Homes Under The Hammer. With these programmes the selling price is largely overestimated, and the time and cost of the project are both underestimated.
Always over estimate 90% of anticipated selling price which is a good calculation to work on. Factor in your profit and loss AND account to see if the project is really worth your time. Remember, it’s anticipated, it could be more or it could be less.
Getting emotional about the numbers
One of the big property investment mistakes is bringing your emotions into the equation. The numbers never lie. Do not get emotional over property as this will cost you money and cause you pain. Don’t chase the deals; let them come back to you. Play the long game – the Progressive Property co-founders had a deal that they recently exchanged that we they had been negotiating on for 2 years and that fell out of bed 3 times! This is not uncommon, and far better than trying to tie a price up too early and getting too emotionally involved and ‘wanting to get the deal done.’
Beginners are especially susceptible to this. Have a strict set of rules and do not deviate from them. If the numbers do not work for you, don’t think they won’t for another investor. Consider selling the lead on/packaging the deal up. Maximise your revenue streams!
Always Selling your Property
If you have read our first book, ‘The 44 Most Closely Guarded Property Secrets’ you will know we bang on quite a bit about you make your money when you buy and not when you sell.
The main reason we believe selling is a mistake is because you are transferring your wealth to someone else. You are slaying the goose that is laying the Golden eggs.
Now, we do believe that IF your property is not performing well, or you have bought a property out of area or you can flip a low yielding property on a quick turnaround, then selling the property to reinvest in another better performing property project or to get out is a viable strategy.
The mistake often seen is investors not investing for the long term. If we go by past property cycles, and property prices increasing in value over time, then continually selling your properties reduces your asset base and long term wealth
Buying Overseas, off plan & out of area
This is probably one of the biggest property investment mistakes. One of the Progressive Property co-founders learned this the hard way in their earlier investing days when Mark bought his flat in Bulgaria which rents out for 2 weeks per year. Many investors are often hypnotised with the fancy artist impression of some beautiful luxury apartments by the sea: somewhere in an idyllic holiday location 3 years off plan.
Buying Next Door to Bad Neighbours
Play a significant role in the end buyers decision, regardless of whether you bought it Below Market Value. Plan ahead. Think “what would an end buyer see?”.
If someone does buy it they are taking on a problem and you will ultimately have to pay when you exit (reduced value, limited ability to sell etc.).
Hiring Cowboy’s
This is always a recipe for disaster. You would be wise to think how cowboy builders get away with their bad practices. It happens more often than first seems and this is a big mistake many investors make.
Here’s what many naïve, green and keen investors don’t do:
- Ask for & verify references by visiting past clients
- Obtain 3 detailed quotes before instructing the refurb
- Appoint approved contractors & go for the cheaper option often paying in cash
A word of caution. These guys are smart. They will seem enthusiastic at the start. They will always return your calls.
“Trust me I’ll take care of you”. It’s amazing the majority of investors still fall for these magic words.
But You’re smarter. Alarm bells should ring especially if:
- Quotes are handwritten & you don’t get a full breakdown
- Offers quick cash discount for money upfront
- Doesn’t offer a contract or sign the one you give them or
- Claims to work for a big firm even producing a fake ID
This will result in wasted time, overrun of costs and more problems than You think.
Investing in Property With Title Defects
Now, don’t get us wrong. Many investors we know buy problematic properties. These are great. There is a big opportunity in doing so, but only if you know what you’re doing. We wouldn’t advise buying a property with title issues if you are just starting out in your journey. The overwhelm and confusion can really hurt. It can distort and you can make big mistakes. To avoid this mistake, speak to a specialist conveyancer before-hand or stay away, as it could take years and lots of capital to fix. If you do venture down this road and want to speak to us before-hand, then get in touch and we would gladly help you.
Buying on emotion is a big property investment mistake
“I love this place! It has so much…potential!”
How many hundreds of thousands starting out got suckered right in. The big, colourful, lifestyle brochures, new build and dreamy holiday homes.
No. Not anymore. This, as we learned the hard way, is vanity. It’s emotional buying. Perhaps you can relate? You see, talk like the above can get you in financial trouble quickly. We know, it’s easy to get carried away. Both Rob and Mark have done it. We’ve all done it. It’s not hard to do it. Yes, you will miss a few ‘deals’ on the way up, the more detached you are which is fine.
But the more you stick to your buying rules and the fundamentals, the better cash flowing investor you will be. If you can’t get the deal, at the price you want, then move on. There will be other deals. It’s a skill to think with logic, not your emotions
“Faking It” is another property investment mistake
You’ve heard the phrase, ‘Fake it till you make it’ right? Well, this one’s for new investors, and yes we know, it’ so tempting to do. Early on, Rob used to ‘Pimp’ Mark out for his personal mentorships.
He took a couple to visit a few estate agents. They were asked how many properties they had, for which they replied ‘over one-hundred’. The look on Marks face ‘..if Mastercard did..’ Suffice to say, we never heard back from that agent. Anyway, the moral of the story, don’t be too tempted to stretch the truth – especially if you’re just starting out. It’s better to be honest (but remember, perception is reality).
Yes, it’s less glamorous. You may lose a few deals Yes, it may even be counter initiative. But in the long run, you will attract more Joint Venture Partners, more property deals, more trust, more credibility because you were honest.
People by and large want to help you. It’s human nature. In many cases, you will get ‘banker status’ within the estate agency, and have the ‘Wheeler Dealer/Diva’ take you under their wing. All by doing what you said you were going to do. Better still, find a good property coach and ride his coattails to your property deals. Either way, don’t “fake it” to the extent you lose all credibility. Be up front and honest.
Breaking Promises and Breaking Trust
You just have to look on the property forums to know the property investing community is tight knit. You’re probably aware that word travels fast, and anyone who is dishonest and untrustworthy will be exposed. Google will cache that for many many years. So how does it relate to you?
Well the quickest way to make a bad name for yourself is to cheat and make promises you choose not to keep. Many of the ‘Get Rich Quick’ scammers are out of business, or in prison. Reputation is EVERYTHING. It’s hard to earn but easy to lose. Sad but true. You don’t want a reputation as someone who cannot be trusted. Word spreads like wild fire! Now, we know that doesn’t relate to you, but it’s good to have this conversation. So what can You do?
The following principles will stop you falling prey:
- Always be open, transparent and fair
- Never take advantage of people
- Under promise and over deliver
- Always be reliable
- Treat others as you would like to be treated
- Don’t ever go back on your word. A handshake is a handshake
A few other property investment mistakes
- Paying a deposit of more than 10% for a property that isn’t even built
- Buying off plan without a cast-iron compensation, termination or refund clause
- Trusting all solicitors. Do your due diligence on them. We have heard horror stories of solicitors handing big sums of money to developers for units that didn’t even exist.
- Assuming a vendor has the right to sell the property – check, double check and triple check.
Our final thoughts on the biggest property investment mistakes
It may sound like we have covered a lot of basic ideas in this blog but we have presented the biggest property investment mistakes that rookies make when starting their property portfolios. This is the ONLY way of being sure what property you are buying.
Did we miss anything or do you wish to find out more? The simply get in touch with us today and a member of the team will be on hand to help you
