How do you spot a bad investment? There are the obvious rules, like avoiding the best house in the worst street and plunging all your cash into a property on the most exposed part of a flood plain.
But the very worst decision you can make? “Buying the house you’ve fallen in love with,” says investment strategist Rasti Vaibhav.
“The danger then is that you don’t think at all, or that you overpay, because you’re blinded by emotion.
“Of course, you have to consider the emotions of potential tenants or future buyers, but discount your own!”
Another dubious outlay is buying a property that doesn’t align with your long-term goals, advises Vaibhav, financial analyst and author of new book, The Property Wealth Blueprint.
If you’re planning to build a property portfolio, then you should instead choose to buy those homes that provide you with equity for the next one, and the next.
Those from which there’s no easy exit strategy can also be a problem, suggests buyers’ agent Reece Coleman, principal of Portico Property.
In the 1990s, he bought a unit on the outskirts of Brisbane and, every time he switched on the TV news, his block seemed to appear in yet another “Shock! Horror!” expose of pyramid selling schemes.
“I had to hold onto it for a long time to make money,” he says.
“But with apartments, I’d always recommend avoiding, too, those that have quarterly strata fees that are more than two weeks’ rent, which can signal excessive facilities or maintenance needs.
“Also, from reading the strata report, beware any that have disharmony in the building or a history of strata levies. That can be a sign that not enough money is being put into the sinking fund.”
There can be issues also with buying a house as an investment on a new housing estate that might take 10 years to fully develop or sell out, Coleman advises.
The next time you need a tenant, or when it comes time to sell, you might have a lot of competition from the newer houses nearby – and which one are renters, and purchasers, more likely to choose?
In addition, ignore the market and demographic of the area you’re thinking of buying into at your peril, warns Darren Venter, director of The Investors Agency.
If all the tenants are looking for two-bedroom, two-bathroom houses on 600 square metres of land, then avoid choosing a tiny house or studio apartment.
“It’s also a good idea not to buy a house in an area where there’s a lot of land for sale,” Venters says.
“The market could end up being saturated. It’s much better to invest in a place where land is scarcer.
“And don’t buy in a single-economic area, one that, for instance, depends solely on mining or agriculture. If that industry hits trouble, then there may be less demand for housing.”
People might also be attracted to a bad investment if, perhaps, it’s going for a cheaper price than the house next door.
But in that case, check out why, urges Vaibhav. It might well be smaller or have an inferior layout or a worse outlook.
“And don’t forget to look for the development potential of a property,” he says.
“You might be able to renovate to improve its value or add onto it to make it a far better investment than you’d first thought.”
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