Investors must not take a ‘set and forget’ attitude if they wish to have a high performing property portfolio.
New investors can end up with an underperforming portfolio inside 12 months if they don’t keep a close eye on their assets and on emerging opportunities in the market.
People think property investment is simple stuff, but you’d be surprised what’s involved in doing it well. There are a couple of key things that can turn a great investment into one that is a drain on your time and bank account. Let’s dig into them:
1. Taking a ‘set & forget’ approach to property management
Once you have your first tenant in and the lease signed, it’s tempting to sit back and let the rent appear in your account. But local property markets are dynamic and in time you could be earning less rent than comparable properties in the area.
Properties obviously experience wear and tear, and it’s important not to be lazy or stingy about making repairs. This can signal to your tenants that it’s ok to be lazy with their maintenance and paying rent on time.
All of this takes time, attention and expertise and that’s why a Property Manager is a good investment. But don’t assume that because you have a property manager, that your property is being managed well.
Properties should be inspected every 3 to 6 months and you should always ask for evidence they’ve been carried out – that means inspection reports and photos.
You should also be offered a sales and rental appraisal after every inspection. This will tell you if you should increase the rent, or sell the property, or keep things as they are.
2. Poorly structured finance
Of course it depends on your personal debt situation, but I commonly see investment properties financed with principal + interest loans. Paying back principal on an investment ties up cash flow that could be used to buy other properties or pay back personal debt earlier.
Interest only loans are a smarter option for investment properties because they also maximise your tax benefit. This is part of the negative gearing concept.
I’d recommend you avoid locking in a fixed interest rate for a 2, 3 or 5 year period if there’s a chance you’ll sell before then. Break costs on fixed interest loans can be hefty and end up costing you more than if you’d gone with the variable rate. Ouch.
Loan security is also an area where a good deal for your bank may not be a good deal for you.
Lenders often prefer to take security against all property in your portfolio, so if they need to recover money, they can sell whichever property is most attractive. Often that’s your family home.
A good mortgage broker is aware of financing tactics like that and will help you make good decisions.
About Owen Davis: Owen has over 15 years experience in property financing, real estate and property management. More than a third of his clients are among the top 10% of property investors in Australia.