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1) No written plan
People generally fall into four categories. First, there are people who are not investing (they haven’t taken action yet). There are people who are not investing enough (i.e. who are not maximising their opportunities). There are people who are investing too much (yes, that’s possible). They think that the clock is ticking and they must buy another property before the bell sounds. These people are probably unnecessarily taking too many risks. Last, there are people who are investing the right amount – not too much and not too little – just right. There are very few people in the last category. The sole reason for this is that people fail to stop and ask themselves; “how much property do I need to own (in dollar value), when do I buy it and what do I need to do with it?” Instead, they buy one to “see how it goes”, get distracted by all things work and family and wake up one day and realise that retirement is just around the corner. Alternatively, some people make a promise to themselves to “buy one property a year”. That is such a meaningless goal and smacks of zero planning (although I must admit that it’s better than doing nothing).
As the old adage suggests, “aim at nothing and you’ll hit it every time”. Having a goal and a plan to achieve that goal significantly increases your chances of success.
2) Not reviewing performance
Time is irreplaceable. There is one thing that most property investment strategies need and that is time. Therefore, if you are holding investment properties, you must ensure that they are using time efficiently. You don’t want to hold onto a property for 10 years only to realise that it’s a dud and hasn’t increased in value by anymore than 5% per year. You’ll never get that time back again. You need to find out if your property is a dud as soon as possible, so that you can sell it to the first person silly enough to buy it.
It is absolutely critical that you review your investment properties’ performance periodically (probably annually). Look at the growth (change in value). Compare it to what the general market has done. If we select good quality assets, then we should expect them to outperform the general market. Therefore, if the median value in your State has increased by 10%, you should expect your property to increase by more than 10% (because after all, the median value is made up of good and bad properties).
3) Not being smart about managing risk
Risk comes with all investments. The higher the risk, the higher the expected return. However, you can exploit this equation by developing a smart risk management strategy aimed at mitigating or transferring as many risks as possible. A risk management strategy is normally developed after the investment strategy. Therefore, once you have determined how many properties, when, where, how much and so on, you can sit down and identify each and every risk. A risk is something that can prevent you from meeting your goals. The most common risks for property investor are:
• Under-performance – the investment’s capital growth or rental yield (income) do not meet expectation.
• Ability to acquire sufficient property – this relates to borrowing capacity, having a debt plan and managing cash and equity.
• Ability to hold onto the property long enough to “do its thing” – this relates to your ability to support the property with other income such as salary. What happens if you lose your job or fall ill and can’t work?
Most of these risks can be mitigated (reduced) or transferred. Fixing your interest rate on your investment loan is one way you can mitigate risk (as your interest rate exposure is therefore capped). Obtaining income protection insurance is one way of transferring risks (as you transfer the risk to the insurance company). It is important that you have a plan to reduce risk as much as possible, as this will greatly increase your chances of success in the long run.
Written By : Stuart Wemyss
Source : Property Investment Update (2 October 2009)
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