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Making a property investing mistake can be extremely costly in both the short and the long term. I’ll unpack the top three property mistakes I see people make so you can avoid them.

Because property is expensive to buy and sell, because selling property has tax implications, and because property involves a lot of work from a money admin perspective, you’ll benefit from avoiding buying and selling properties as much as possible.

Your aim will be to find a good property you can buy today knowing that, because it will continue to grow in value into the future, you will never need to sell it.

With this in mind, there are three common property mistakes that should be avoided:

Sacrificing growth for income

There is a lot of talk out there about building a positively geared portfolio, but it can lead to serious issues with your investing.

Don’t get me wrong. Buying positive-income properties is good. But it’s a mistake to compromise on the growth potential of a property to get a higher rental income return. 

This is because properties with a higher rental yield typically have lower growth prospects – not always, but most of the time. For example, properties in regional and remote areas will deliver you a higher rental income yield, but they usually don’t grow in value at the rate property in a capital city does.

If you can find a property that has strong growth potential and meets the criteria I’ve outlined here, and it has a strong rental income yield, great. But, in my view, it’s a mistake to compromise on the growth of your property for a few extra bucks in rent.

Investing for tax purposes alone

An investment property comes with some tax perks. Negative gearing allows you to deduct your mortgage interest and ongoing property costs from your income. And if you buy a new property, the tax deductions get even bigger through the magic of depreciation.

Depreciation is the reduction in the value of the fittings and fixtures of a property over time. When you buy a new home, before you move in everything is brand new and worth the full retail replacement value.

Depreciation doesn’t really cost you money. It’s not as though you pay money out of your pocket as things in your property come to be worth less. But with the tax rules, you can claim this depreciation in value as a tax-deductible expense and you receive money back at tax time. Depreciation is typically strong over the first seven years after a property is completed and reduces to close to zero beyond this point when the property is considered to have been fully depreciated.

Depreciation can transform what would be a negatively geared property that costs you money each month into a positive cash flow investment after the tax benefits are factored in.

But it’s easy to be blinded by tax benefits and compromise your investment. If you fall into this trap, you might get some great tax deductions for a limited time, but find yourself in a difficult situation once the benefits end and you are faced with the reality of a poor investment.

You may need to sell your property at a smaller gain, or even a loss, but more importantly you’ll have missed out on purchasing a property that makes you good money in line with average long-term growth rates.

Buying off-the-plan

This one is a little controversial, and for good reason. Many investors have made a lot of money from buying property off-the-plan, but there’s one big downside I can’t get past.

Buying property off-the-plan means purchasing a property before it’s built, typically through a developer. You agree on the price you’ll pay for the property and sign your purchase contract before the property is finished. Once the property is completed, the purchase is finalised and the property is yours.

The advantage of buying a property off-the-plan, particularly in a rising property market, is that you lock in the price of the property today, and by the time the contract is completed, the property could be worth more.

But if the market falls or if your property was overpriced or if mortgage rules change, you can run into serious trouble. There’s also the risk of your developer going bust in the middle of your build and leaving you stuck. The long-term impacts can seriously affect your plan to replace your salary by investing.

The rapid interest-rate-tightening cycle and the dip in the property market in 2022 and 2023 have impacted a lot of off-the-plan property purchases. There have been countless stories of people who ran their property affordability and borrowing capacity numbers based on interest rates that were much lower than those they could access when it came time to complete their purchase. 

For these people, affordability was a challenge, and a number of them have been unable to complete their property purchase, losing money and time.

Because the potential downsides of buying off the plan outweigh the potential upsides, in my opinion this strategy should be avoided.

Edited extract from Virgin Millionaire: the step-by-step guide to your first million and beyond by Ben Nash (Wiley, $34.95), available at all leading retailers.

Disclaimer:

The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.