Mistake #1: Jumping right in without enough of the right information Fortunately for you, you are streets ahead of most other people here, due to the fact that you're reading this book! It's only a start, but information like this can literally save you millions of dollars over the next few years of your life.
Information is that important.
We live in the 'information age', yet I'm constantly appalled at the lack of information gathering that the average property investor does before they spend hundreds of thousands, if not millions of dollars on a property.
Going off half-cocked and assuming you know everything you need to know is always a recipe for disaster.
Remember, I've been doing this for over 26 years now, so I've seen them come and I've seen them go.
But information products like this one are absolutely invaluable.
As I said though, it's only a start.
One common factor to all successful property investors is that they seek expert advice, early, and they pay for it.
The modest fee for good advice is always far, far less than the price you'll pay if you make a mistake with hundreds of thousands of dollars of somebody else's money.
No man (or woman) is an island.
Arnold Palmer, aged in his seventies, still hires a coach to help him with his golf swing, even after all these decades at the top of the game.
There's the 'school of hard knocks', and the school of 'prior learning'.
So, the 'trial and error' methods that used to be our only options are no longer needed.
Mistake #2: Falling in love with a property It happens to the best of us, by the time we get to the front door, we've already decided to make an offer.
There would just about have to be an ancient burial ground in the back yard to stop us.
The gardens are beautiful, the house is clean, fresh and inviting, it's got some really great bells and whistles, it has that vague indefinable something about it that you can't quite put your finger on, but it's there just the same.
You can easily imagine a great life there, even though you're looking for an investment property.
Even though it's a fair drive to the nearest schools and the local shop is a little overpriced deli that may not last another year in business.
Even though those fancy gardens are going to need tending to at least every weekend, and a heck of a lot of water.
But those downsides are drowned out by the handful of features you just love - the sunken lounge, the bar, the new dishwasher, the lush grass and English gardens.
Make no mistake - these things can certainly get you higher rents, and make for higher house values, but you must make sure they aren't outweighed by other negative factors.
Psychologists tell us that we buy on emotion - then justify with logic.
What logic is there to a convertible car with a top speed of nearly 300 km/h? It's all emotion, people fall in love with them, and they'll stretch the budget to pay more than they should.
It's only later on that we start thinking about the resale value, the high quality of manufacture, the extra safety mechanisms.
Property investing is no different.
Do NOT let your feelings for a particular property affect your mathematics in any way.
Crunch your numbers, see if the figures work out, weigh up factors like location and maintenance, get a second opinion from someone qualified, and then, if everything works out to you making money, not losing money, move ahead.
Due diligence is just about the most boring task in the world - and it's meant to be that way, to take the emotion out of it.
This helps with Mistake #3: Not using the Renovation Rule© The Renovation Rule© states that: o It will take 3 times as much money and twice as long to get your investment property ready for rental.
With this Renovation Rule©, you can adequately prepare yourself for any unexpected expenses.
And while you no doubt plan for the best, it's always good practice to prepare for the worst.
It's not being negative, it's just in case.
So, let's do an example.
Let's say you have a nice apartment in the city, lovely views, great facilities, filthy carpets and a tacky old kitchen.
You are planning on spending $5000 on new carpets and $30,000 on a new kitchen.
You get the keys and start paying the mortgage and give yourself 4 weeks to have new tenants in.
That's your base, and that's the actual, inflexible, final plan to most people.
But most people don't know the Renovation Rule©, which changes your budget to allow for $15,000 for new carpets, and $90,000 for the new kitchen.
You'll also now be allowing for an 8 week period with no tenants.
This means you're losing money every week.
Big caveat: let me assure you, this does NOT mean that you go out and spend $105,000 on the carpeting and the kitchen; this isn't designed to get you back down to the bank to borrow more money.
This tool is designed to build in safe margins, and in the end, help you buy the property that you will be able to successfully turn into a profitable rental property, not something that will drive you to the very brink of your financial resources, (and beyond).
Here's an example of what I mean: Let's say you have a budget of $500,000 to buy your property, and you decide that all factors are good on the apartment at $400,000, the one that needs the carpet and the kitchen done.
You'd think that $100,000 would easily cover that, and you'd be right most of the time, but what if? With the Renovation Rule©, it's right on the edge of tipping over into a no-deal.
You may decide to go ahead and run a very slight risk, but in most cases you'll be fine.
But what if you can't get the apartment for less than $475,000? Most people would think 'Well, that's well inside our budget, we've got $25,000 left over, we'll get cheap carpet, and we'll spend the rest on the kitchen.
'Firstly, this means accepting whatever you can get for the money you have left.
You might be very dismayed at the kitchen you end us settling for because of financial constraints, and it could even lower the rents you can ask for.
Plus the other big factor - what about the time between when you start paying the mortgage, and the time your new tenants start paying rent? Even with today's market where you can tenants in no time flat, your renovations will take time to complete.
You have to budget for this.
(And I've assumed in this example that all your costs come under that $475,000 figure.
) In this case, if the seller remains stubborn, you may have to keep looking.
This keeps you from...
Mistake #4: Paying too much for a property This is what happens when you make the 2 previous mistakes - falling in love with a property, and then not allowing enough cash to spare after the sale.
If you are embarrassed to make a relatively low offer to a seller, you have to get over this if you want to get the best deals.
Here's the thing: you do not know the seller's situation.
The seller's reason for selling does not affect your reasons for buying, unless the museum next door has been turned into a nightclub.
Oh, they may give you reasons for selling, they're moving to a warmer climate, closer to family, they want a smaller place, a bigger place, and they probably aren't lying.
But you often won't get the real reasons, and it really does not matter.
So you have nothing to fear, no guilt to assume, if you make what you think is a 'lowball' offer, and they accept it right away.
It's got a lot to do with your 'millionaire mindset', as I went through earlier.
Chances are they're happy with your offer, but your mind insists on putting out feelings of guilt, you almost feel as though you're ripping them off in some way.
Then you have the folks who list their property high to 'shake the tree', and see what falls out.
It's certainly a strategy you can use when you're selling, so be aware of it as an investor.
Do your homework; make an offer somewhat below what you expect them to be OK with.
If they say no to your first offer, this means they value the property, and you can always make another offer.
Mistake #5: Falling for dodgy property investment schemes There are so many stories of people falling for various scams.
And there are several factors making it more and more difficult to pick the cowboys from the honest experts, such as the media seeming to go after their targets with a 'guilty until proven innocent' attitude.
Now, if you've been trapped by one of these guys before, it's not the end of the world.
And it's certainly not your fault, they always seem to appear so professional and their sales pitch is so enticing, and our government, despite their best efforts, hasn't been able to so as much as we'd like them to.
There is also the fact that there are many genuinely honest experts out there as well, so how do you separate fact from fiction? 1.
http://www.
scamwatch.
gov.
au - This is a government website where you can check up on the latest scams reported, information on how they operate, and precautions to take.
It talks about strategies scammers have used in the past, such as promising very high returns with no risk, cold call telemarketing, 'guaranteed rental income', a hard sell to buy 'off the plan', and even flying you to the property, where you'll be pressured to doing the deal without getting independent advice.
Take a look around this website, but be warned: The site talks about several legitimate business strategies, such as free introductory seminars, motivational speakers selling books the government apparently considers 'overpriced', and they put a spin on these things as if everyone using free seminars is a scammer.
You're a smart, mature adult - you can make your own decisions without the alarmist attitude of this site.
2.
Get independent professional advice - there are several factors to help you decide exactly who you can trust when it comes to advice that you can trust.
One quick and easy check you can do is to go to http://www.
asic.
gov.
au and from there you can search for business registrations and financial license registrations.
I've seen companies come in from overseas and register their company in an attempt to look legit - but when they're providing financial advice and don't have an Australian financial license and try to tell you they don't need one - that's an instant indicator they're scammers.
You can check all those details here.
3.
There are other 'instant indicators' which tell you that the people you're dealing with are real, honest and genuine.
One indicator is testimonials and client comments.
Can they give you even just a couple of people who will say nice things about them? Better yet, can the provider give you good evidence? By that I mean if somebody will say these comments on video, there's no disputing the facts.
Written comments are good too, but if they can't give you 2 people who would do business with them again, that's a worry.
Are they a 'fly-by-night' operation? Were they first registered as a business last week? Or have they been in the area for many years? Do they promise expertise over the entire country, telling you they know every detail about every area, or do they specialize in one area of Australia? It's much more likely that they know what you need to know, if they specialize in one area.
The main point to remember is that most companies and most people are legitimate, knowledgeable people.
The real crooks and cowboys aren't as common as the media would have you believe.
But, importantly, they are out there, awaiting the unsuspecting first time investor, looking for answers.
Don't let a sales pitch put you off, watch out for people lacking credentials and experience instead.
Mistake #6: Being under-insured Insurance for your investment property goes far beyond simply insuring against fire or natural disasters.
There are several providers of landlord insurance, and you simply cannot afford to neglect this area.
There always seems to be stories on the news and current affairs shows about deadbeat tenants refusing to leave a property, refusing to pay rent, even going so far as to basically destroy an entire property, and without complete insurance, guess who's paying the bills? You are, unless you are covered for the damage.
Insuring rental property is crucial for real estate investors and just as essential for lessees who own valuable goods that would cost thousands to replace.
Both real estate investors and tenants can be sued for medical payments if someone is injured on their property, whether inside or outside.
Sudden accidents such as high winds that shatter windows, plumbing problems that instigate water damage or burglaries that happen due to lax security measures affect not merely the landlord who has to repair the damaged building, but also the lessees whose property has been stolen or destroyed.
Landlord insurance does not cover a lessee's personal property.
Landlords Require Insurance to Deal with Various Risks Landlord insurance policies vary widely, from simple "named peril" policies to comprehensive or "all-risk" insurance policies.
Whether coverage is restricted to specified risks or includes every risk not specifically excluded in the policy, landlord insurance applies to storm damage to the building and any of the landlord's fixtures and appliances inside the units.
Premiums depend on quite a few factors, from the building's construction to its tenants, and optional coverage makes premiums increase but offers necessary protection.
Optional coverage can include shielding from loss of rents, landlord liability that covers legal defense expenses and medical payments, coverage for theft or vandalism, earthquake coverage, flood insurance and Replacement Cost coverage, which pays far more than an ordinary Actual Cash Value policy that subtracts depreciation.
Landlords can reduce their premiums by accepting a higher deductible, not allowing pets or holding on to excellent lessees.
The increase in lawsuits over toxic black mold has many insurers dropping mold coverage or making it an expensive option, which may still be essential if the leased property is older or located in one of the many states prone to mold.
Rental property owners should realize just what their policy covers, what it excludes, and how to file a claim.
They also should take photos or videotape their property, take inventory of what they own inside the units, and maintain excellent records of tenant communications.
Keeping the property clean and secure can prevent negligence lawsuits, so real estate investors should make important repairs immediately.
Owners also should inform their insurance agent or their insurance company's claims hotline as soon as a covered incident takes place.
There are so many insurance companies and so many options out there; it's well beyond the scope of this book.
I mainly want to warn you about the dangers of not being covered for absolutely every eventuality that could cost you money.
Your investment property is in all likelihood going to be the biggest investment you will ever make, so it makes sense to protect that investment.
Mistake #7: Doing it all yourself One big mistake many first-time investors make is going it alone.
It's tempting to think you know everything you need to know, you're seen the people talking about investment tips on TV, you've spoken to your friends about what they think they know about it, and you have approval from the bank.
No man (or woman) is an island.
One commonality about all successful real estate investors is they all seek expert advice.
If you pay $500, $1,000, or more for advice which saves you or makes you tens or even hundreds of thousands of dollars, is that not a good investment in itself? You are not alone.
You do not need to go to the 'school of hard knocks', wouldn't it be helpful to be able to pick the brains of someone who has been there, done that? Never be afraid to ask for help.
I used to keep problems to myself.
I never want to ask for help.
This is because I feel that if I ask for help, it will reflect badly on my capability to deal with personal problems.
In other words, I was too proud to ask for help.
For example, if all my peers know how to swim very well and I have difficulty learning to swim, I will be too proud to ask them to share and teach me how to swim well.
I am afraid that they will laugh at my inability to swim.
It is normal for people to have problems too big for them to solve alone.
It is normal for such people to ask for help.
Talk to people around you, especially old people.
You will find that they have asked other people for help at some points of their lives.
What I am trying to highlight is that any problems that you have encountered is nothing new.
History of human civilization is already so long.
This means that there is definitely someone else that has encountered the same problems as you.
This implies that there are ready solutions to your problems.
All you have to do is to change your mindset and ask for help!