Top 10 pitfalls of property investment

02 September 2020

Between political uncertainty and economic turbulence, it’s hardly surprising to see the viability of property as an investment model be called into question. Nevertheless, bricks and mortar continue to stand the test of time as a means of hedging against inflation.

Why?

Because, unlike parachute pants or leg warmers, property will never go out of fashion.

And unlike other investment vehicles, you can increase the value of your property by investing money into it – if you’re creative, you can add considerably more than you spend.

However, despite how secure, there is plenty of room for error in property investment.

Impressive returns aren’t guaranteed; things can and do go wrong. Below, we’ve compiled the top 10 pitfalls to help you steer clear of bad practice.

1. Due diligence done wrong

Due diligence is the bread and butter of any sizeable investment.  Put it this way – you wouldn’t buy a business without tangible evidence of past success and future projections. The same is true of property: unless you do your research, you risk paying the wrong price or buying the wrong property.

Before any commitment is made, consider who you want to rent your property and the kind of property they would seek – do the two marry up? Does the price-tag reflect the average budget your target tenants would have to rent it? If the answer is no, it may be time to go back to the drawing board.

2. Underestimating expenses

It’s easy to overlook potential project costs and only hold back minimal contingency funds. Unfortunately, the outcome is often a nasty surprise for investors. Expenses can be unpredictable, and as tempting as it may be to put as much money as possible into a deposit, don’t forget the costs that come with owning a buy-to-let property. From fixing broken appliances to funding unplanned vacancies, a healthy cash buffer is essential in covering ad-hoc expenses.

3. Heart over head

As a property investor, your decisions should be driven entirely by facts, not feelings. Instincts may be suitable for private buyers looking for that perfect place for their family to settle down; it may even factor into the decisions made by commercial tenants to move into a new office.

No matter how eye-catching a building may be, your job is to focus solely on how the property will align with your objectives. Proceed with caution and only push ahead if you are certain the property will generate positive cash flow in the future.

4. Choosing the wrong contractors

If you’re investing in land to build on or buildings to renovate, your choice of contractor can be make or break in generating returns. A cheap quote may look alluring and align with your ambitions to keep the costs down, but there may be a number of hidden costs that aren’t being factored in. To prevent your costs from spiralling out of control, always request a clear breakdown of prices and establish exactly what is and what isn’t included.

5. Chasing high yields

While high-yield properties can bring the highest returns, they nearly always come with the highest risks. This often comes down to costly renovations and above-average tenant turnover. Chasing yield can be tempting, but it can also leave you exposed. When stock markets fall, it’s a reliable fixed income that protects your property portfolio. So, unless you are prepared to allocate a seismic chunk of your budget towards covering unpredicted vacancies and renovation, it may not be worth the risk.

6. Lack of diversification

As the old saying goes, don’t put all your eggs in the same basket. No matter how safe a bet a property seems, it still carries risk that can be offset through diversification of your portfolio. Should something happen to the property or the neighbourhood causing an unprecedented period of vacancy, you won’t be left without a steady income.

7. Too much haste

An eager investor spies what looks to be the perfect property to add to their portfolio and hastily moves to sign. They don’t sleep on a deal; they don’t weigh up the risks. Occasionally, they will be right in doing so. More often than not, a rushed investment will cost them money from their inability to see problems and stalwart belief in what the seller’s agent tells them.

8. Too much hesitancy

Property prices can change at the drop of a hat, so holding out for a better deal isn’t always the best approach. While you don’t want to commit to a property without planning, dithering can also lead to the loss of a golden opportunity.

9. Self-managing your property

Managing a portfolio is a full-time job. While it’s true that a property local to you (rarely the best investment) may be easy to check up on, a geographically dispersed portfolio is a different story. As well as finding and vetting tenants, you will need to keep up with maintenance issues, ensure rent is being paid on time and keep all paperwork in order – not to mention making regular inspections. All things considered, it’s undoubtedly worth hiring a trusted company to take on management on your behalf.

10.  Using the wrong solicitor

Choosing the right solicitor isn’t just a question of costs – it’s a matter of expertise. Opting for a lawyer on price or even stature can lead to poor decisions. To get the best legal advice, seek out a specialist who understands and has experience in the type of property you’re investing in. Ask for evidence of their ability to work on transactions of this kind and never assume that a fancy office or expensive suit equals quality.

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