Avoid these 5 common mistakes in property investment

Investing in property can be a good  way to build your passive income and is a relatively steady form of investment. But purchasing a property requires a huge capital investment, and as a buyer, you should always keep a lookout on any pitfalls that might come your way.  

Here are five most common mistakes budding property investors tend to make, and how you can avoid them.

A property that you want to stay in is very different from one that will give you a worthwhile return on investment (ROI). You might love the idea of staying in the suburbs, near the countryside, where there’s plenty of fresh air and open space. However, potential tenants or future buyers might not appreciate the same aesthetic.

So when looking for a property to invest in, don’t confuse your investment goals with your personal living preferences. Letting your emotions override investor logic can cloud your better judgement.

Do your research with an objective approach and take into consideration:

i. The risks and rewards of the property you're looking at

ii. Look at the location and surrounding neighbourhood

iii. Compare historical trends in capital appreciation and the rate of rental returns

A common mistake is buying into hype. Afraid to lose out on a good deal, investors jump into a purchase before thinking it through. In a low interest rate/profit rate environment, you may be even more tempted to buy on impulse but impulse buying may leave you with hundreds of thousands of ringgit in real estate liabilities. You may not be able to quickly sell property at a profit and then you’ll be facing a loan/financing commitment of many years.

On the other hand, many investors do lose good opportunities by dallying. If something is a good investment, chances are it’ll be snapped up quickly.

So avoid rash decisions, but don’t sleep on them for too long either. Do your due diligence and act wisely.

Finding and buying a property is only half of the journey. Managing it well, so that it brings you decent returns and even a profit is also important. Like any investment strategy, it starts with planning. Investors who don’t plan how they want to use their property to generate wealth are not maximising their ROI.

Consider your financial goals: do you want to earn steady rental income over a long period, while allowing your asset to appreciate; or do you want to quickly resell it at a profit? Track the progress of your goals and adjust your plan accordingly. Perhaps you will need to increase rental price, or wait longer to sell your property due to slow capital appreciation. You may also consider increasing your potential for wealth creation by retrofitting or enhancing the property’s features.

Poor cash flow management can put you in the red zone even if you’re earning rental income. Treat your property like it’s a business – calculate how much is coming in and how much is going out. Include all related expenses such as renovation and maintenance costs, depreciation or appreciation, insurance, taxes, stamp duty, etc.

This is also a good exercise to do before you invest in a property, to estimate costs and project potential returns. Property cash flow should be calculated over many years, as it’s possible that some properties will generate negative cash flow in the first few years and then pick up capital growth later on that will more than cover the initial losses.

Many investors especially first-timers are caught off guard by the extra costs and paperwork involved in buying and owning a property. Gather views from property agents, lawyers, and financial advisors on the best options available to you, from the value of the property to financing and legal obligations.

Be guided by logic and rationality, plan well, manage cash flow, and seek advice. The mistakes other investors have made in the past offer sound lessons which you can learn from.