This is scariest phrase if we used it in property investment. “Why people often end up buying the wrong Property?” If you are in this position, you are in deep shit. In year 1997/98, when the financial crisis happen in Asian, a lot of the development project halted. Developer winding up and the buyer strapped in between and yet need to serve the bank interest.
Buying at the wrong location
Buying in the wrong property in the wrong location is fatal and yet, the most common mistake made by most people. The mistake only can be forgiven if you are buying for your own use and intend to stay there forever, then you can buy a property in any location you like.
Most of the time, when I ask investors why they purchased their property they’ll say things like: it was close to where they live, close to where they holiday or close to where they want to retire. These are all emotional reasons for buying property, and while possibly a good way to buy your home, they are not the right way to buy an investment property.
However, if you are buying a property for investment purposes, you have to buy where ‘others people’ LOVE. And the ‘others people’ refer to a lot a lot more.
Buying the wrong property
The second most common mistake of most people buy is buying the wrong type of property. Why do I say so? If I ask around family members and circle of friends, which one would you want to buy and rent out? I would say 100% will replied me and say “LANDED house”! The issue here is they do not know how to differentiate the rental income Vs capital appreciation. So end up buying the wrong property for investment. Different property will have different purpose from investment point of view. One must know what is the plan and strategy for execution.
Even if you had bought wrong property at the wrong location for your first or second property, then below 2 are the crucial actions to make it RIGHT.
Derived a plan
Most of us willing to spend time planning their holidays but do not want to do some planning on their financial future. Buying a property is a huge commitment and need clear plan on the execution. Be it middle term or long term, just need to have a plan with it.
From my observation, in general there are 2 group of people:
They don’t invest at all.
Even my close friends who are doing very well fall into this group – they just do not take actions on their own future finance at all.
They don’t invest enough.
Quite a few of my family members and friends only buy one or two and just stop there. There are not comfortable to buy more and afraid of DEBT. Most of the people will buy one for own stay, second for investment be rental or capital appreciation. That’s it!
Constantly reviewing property portfolio
Someone said that property investment is a long term investment. So they do not review it very often. Because all of us know that it is not liquid at all even though want to sell it. It will only cash out after 6 months even had a buyer.
But that does not stop you from reviewing your portfolio regularly. You may need to do some renovation on your lower rental properties by enhancing it the exterior or interior. Dispose the under performing property that keep giving you negative cash flow or refinance the those property that had appreciated a lot.
Do you see that in fact there are a lot of actions or plans can be derived out if you study your own portfolio regularly.
Managing the risk
I always remember this phrase “Prepare for the WORST, only hope for the BEST” It simply said that, all investment has its own risk, we need to managed it by preparing the worst case scenario, if it happen, there is nothing to bring you down as you are already prepared for it. If it turns out to be Good, then it is a Bonus. Many investors don’t understand the risks associated with property investment and therefore don’t prepared well.
Normally for me, I will prepared at least 6 months safety fund to sustain a property. Just in case hit by financial crisis or vacant for 6 months.
This could be one simple mistake investors make that thinking there will be always tenant. Bear in mind that there are a lot of new development around. Once there are ready, the tenant will have more choices and the competition will be fierce. You will need to have sufficient financial buffers to ride through from one property cycle to the next.
Another possibility is interest rate hike you will run into trouble if not prepared financially.
Lessons learned today:
- The most terrible feeling is the realization that you have spent a lot of money buying the wrong thing.
- Buying property with emotion is not a right thing to do. Having money and knowing how to pick the good property and location are two different things.
- Before putting your hard earn money down for your property, you must have a plan on how to execute it and what to do with it for the next five to ten years.
- Constantly review on your portfolio and made small decision along the way. It will help to improve your portfolio significantly.