The common pitfalls to avoid when searching for the ideal investment

CAUTION: If you are considering investing in property it is always best to do your research before taking the plunge. Photo - Shutterstock.
CAUTION: If you are considering investing in property it is always best to do your research before taking the plunge. Photo - Shutterstock.

The art to choosing a good property investment is finding the right one, at the right price and in the right location.

However, there are some common pitfalls to avoid when searching for the ideal investment according to realestateview.com.au.

Choosing a property that the banks don't like

Banks consider several investment property types as risky. These often include serviced apartments, student accommodation, defence housing, small apartments, commercial properties and properties in a business or mixed zoning or in the country or outer coastal areas.

Major banks occasionally don't want to lend against certain properties or restrict loan to value ratios (LVR's). Purchase these types of properties with caution.

If it's not good enough for the bank's money, it shouldn't be good enough for yours.

Know the risks of buying "Off the Plan" or brand new properties

Be wary of developer incentives; they can seem almost too good to be true. Be wary of "free cars" or "free holidays" as the purchase price will usually account for this. Many buyers purchase "off the plan" due to the significant stamp duty savings. Yet they fail to realise that this is usually offset by the GST they indirectly pay, as a developer pays 10 per cent GST on the building costs component. For example, if a $500,000 apartment costs a developer $250,000 to build, they will be charged $25,000 GST which will be passed on in the purchase price.

You should also be wary of high Owner's Corporation/Body Corporate fees which will ultimately affect your cash flow and rental return. Buildings with lifts, communal gymnasiums and pools usually come at the cost of higher fees.

Not being able to afford the investment property

Many investors don't do their research on investment property prices. This often means they overpay, which ultimately affects their cash flow and out of pocket expenses. They also don't properly research rental returns in the area, often based on the agent's overestimated rental valuation.

A simple solution is to prepare a detailed cash flow analysis before you buy, which many investors overlook. Don't forget to include expense items such as bank interest, lender's mortgage insurance, stamp duty, council and water rates, property management and leasing fees and Owner's Corporation fees.

Ensure that you have income protection insurance which is tax deductible and will cover your personal income in certain scenarios.

Always have money set aside in a bank account for any emergencies or maintenance items that may arise.

Purchasing the property in the wrong entity

Many investors sign a contract first before speaking to their accountant about their ownership structure options. This is often too late. Should you buy the investment property in your name, family trust or a Self-Managed Super Fund?

Setting up an SMSF or family trust takes a lot of time. You need to establish this before signing any contracts, as it is too late afterwards, even if you sign the contract "And /Or Nominee" so you can nominate a related entity.

There are pros and cons to different ownership structures and many investors buy property in the wrong ownership structure. Investors should discuss the different structures with their accountant before signing on the dotted line.

Focusing high yields and not on capital growth

Be wary of buying property that gives you good rental yields or good tax deductions or depreciation, but very limited prospects for creating equity. Capital growth should be the most important consideration as this equity will accelerate your wealth creation strategies and allow you to create equity and use this to build your portfolio further.

This story How to avoid the common pitfalls first appeared on Port Macquarie News.