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Karen Wheller

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7 Recent Mistakes in Property Investing

Are you guilty of these mistakes?

Property investors are not existing the market, speculators and property trading people (can’t call them investors) are exiting the market with great loses unfortunately.

Right now property investors are entering the market and have been doing so since the market turned to a “buyers market”. I read so much and in so many articles the word “property investors” in context that is often incorrect.

The fact is that in times of high equity growth, mass media “hype” and some “bull market” economists writing endlessly how the “market will always go up”, the masses come to the party and start buying with very little knowledge to none and so many of the mistakes I listed below start happening.

Because the “noise” is so high, companies start showing up and getting on the bandwagon selling to the “hype”. This gets people caught in the hype calling themselves investors and buy as much as they can without any knowledge of investing fundamentals. We have seen these types of companies go down more than once, no need to mention their names.

Property is not the only market that has suffered from this. The Dot Com boom and doom was no different, so if you fell into the buying frenzy do not feel bad, instead learn from it because it can benefit you in the future.

What was missing in those purchasing decisions that we can learn from?

1. Property growth does not go up all the time; it goes up and down like all markets do. This is also what happens in micro economies (areas and towns) – those cycles must also be taken into consideration, not only the overall market status. Experienced property investors that hold properties for investment purposes know this all too well and buy low, not in high priced markets.

2. Interest rate increases have to be taken into consideration when calculating shortfalls. In other words, if you can afford a property today, it does not mean you can afford it tomorrow or with a 7% or more interest rate increase. When investors buy they understand the need to buy at a price that sustains increases in interest rates and they calculate those in when offering a price to the seller.

3. Capital reserves were not saved to service debt in a bad case scenario. When taking on debt experienced investors take into consideration reserves and income to service debt. Because in the hype time of the property boom in South Africa most properties sold to investors with a very large shortfall, the reserves part became more important than ever, but this was not taken into consideration by many.

4. Properties were purchased with extremely high gearing, meaning mortgage bonds anywhere from 100% to 108%, which made repayments much higher and with increase in interest rates, unsustainable to service the debt. You can read more about the risk of buying investment properties for "free" in my past blog post.

5. So called investors, looked only at capital growth and very little at income, therefore their affordability went down even further if they needed it in bad times.

6. Got caught in the hype. If an estate agent says that a property investment is good, that does not mean it is good for everyone or for you. Buying simply because someone says, “property always goes up”, or “this is a good investment”, is blatantly stupid. An investor always runs the numbers to check for affordability and then sustainability in good case scenario and bad case scenario.

7. Greed also played a factor in the human psyche. Buying more and more just because of growth without looking into any fundamental factors. Many first time investors saw all of the sudden their properties grow in capital by 50% and 100% got greedy and started buying more and more properties. They did this without looking at financial scenarios if interest rates go up or how much of their mortgage bonds are covered by rentals and what reserves would they need to avoid repossession.

After all said and done, in my opinion, these mistakes have one core problem: knowledge. Any investor with knowledge has the ability to calculate the deals and understand constraints, forecasts and affordability and therefore would not make these mistakes. We are all human and can make mistakes, however, when an investor buys by the numbers and without emotions such mistakes are unlikely to happen, at least not to the extent the type caught so many people.

Those are just some points, there are of course, many more factors. However what I am trying to point out for those that got caught in the hype is that knowledge is power. If in this downturn they bought wrong it is the time to learn and assess the decisions made in the past.

Hopefully learn enough so that the next decisions are sound and sustainable, and therefore build wealth through property and not become poorer or worse repossessed.

This property bubble or downturn is in fact providing many valuable learning lessons that can make one rich in the next cycle.

In summary, property investors, that bought the right properties, by the correct numbers and got their affordability right while calculating risk, are still in the market and are doing better than ever – it is their perfect time to grow their riches. Those that are in distress and made mistakes must learn the lessons and get into the market again at the correct price in the right time for them.

 

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Copyright (C) 2007 Alain Georgette / Copyright (C) 2006 Frantisek Hliva. All rights reserved.

 
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