Top traps for first-time property investors

THERE are plenty of pitfalls the first-time real estate investor needs to avoid, writes Anthony Keane. Here's a list of the most common errors and how to avoid them.

Getting your foot in the door of property investment can be a scary proposition.

It's not every day you sign up for hundreds of thousands of dollars of debt for something you are not living in.

History has shown that, for long-term investors, the rewards are usually worth the risks, but there are plenty of traps the first-timers need to avoid.

Tax, interest rates, tenants, property agents, renovations and insurance are among the key areas where mistakes can cost investors big money, or at least deny them some of the profits they seek.

Today, Your Money examines some of the traps for first-time property investors.

Seminars that bite

University lecturer, author and investor Peter Koulizos warns about so-called "property education" seminars that are really just sales seminars designed to flog overpriced property to pumped-up investors.

Home loans, savings accounts and more

"But I would encourage people to try to see lots of seminars just leave your chequebook at home," he says.

"You get different perspectives and you can get good information, but just go with your eyes wide open."

Where's the research?

"Some people spend more time researching the plasma TV they are going to buy, rather than the property they are going to buy," says Koulizos, who wrote The Property Professor's Top Australian Suburbs.

These days we are spoilt for choice, with a wealth of information about property prices, trends, hot and cold suburbs, tips, traps and warnings in the print media and online.

Buying for tax purposes

Koulizos says many people look at property investing as a way to get a bigger tax refund.

"But you are only getting a refund because you made a loss," he says.

This practice is known as negative gearing, but seasoned investors know that a positively-geared investment where the property pays you a profit is the ultimate aim.

First-time investors are usually negatively geared in their approach, so they may as well get their tax refund back sooner.

Louise Carr, a property strategist with investment group Ironfish, says completing an income tax variation form can help smooth out your cashflow rather than get a lump sum refund.

"This way you can organise to get your tax back on a weekly or fortnightly basis with your pay," she says.

Depreciation debacles

One of the best tax benefits from property investment is being able to claim a deduction for depreciation of items within the property and the building cost of the property.

You don't physically pay these costs, so effectively it's free money coming back through your tax return.

However, many investors don't understand depreciation, Carr says.

"Deductions for new homes can be up to $15,000 a year.

"We often find that some accountants don't make people aware of it. We recommend going to an accountant who owns property themselves, so they know the advantages and are aware of tax legislation."

A depreciation schedule will list all your depreciation deductions. They typically cost $500-$600 and are available through a quantity surveyor, are tax-deductible themselves, and are available through a quantity surveyor.

Bad advice

Everyone has an opinion about buying property and these days opinions are deeply divided about the short-term outlook for real estate investment.

There are also different opinions about what to buy, where to buy and tax strategies, and investors should not rely on the advice of friends and family members, who may have completely different financial situations.

Carr says getting good professional advice is crucial to owning the right investment.

"People who get advice from friends and relatives find that their investments are generally not set up properly," she says.

Paying too much

Ian Lloyd, an advisory board member of property and finance group Investa Solutions, says some investors are paying more than they should.

"There are developers out there who, I believe, are offering properties that are overpriced," he says.

Lloyd says some government schemes and incentives are prompting people to create properties and developments that are "a little manufactured" and slug hefty management fees, Lloyd says.

Property management is another area where people can pay too much.

"Don't pay letting fees or re-letting fees to property managers," Lloyd says.

"For every week of rent you give up, for example for a letting fee, that equals 2 per cent of your rent. So if you pay an 8 per cent management fee but there's two weeks' rent for letting, it's 12 per cent, then if it's re-let and there's another fee, you are in effect paying 14 per cent.

"If you can negotiate a flat fee something like 10 per cent you don't lose rent upfront through letting fees."

No safety net

Investors can lose everything if something goes wrong and they don't have the financial firepower to cover the costs and their loan repayments.

"Have a strategy where you have set up a reserve," Lloyd says.

"A good finance broker or adviser can help you set up a buffer that would mean if you lost your job you could still keep the property."

Carr says it doesn't have to be cash an available line of credit could be enough protection.

"Have a kitty of $20,000. Then if you run into trouble or tenants don't pay on time, you can still sleep at night."

Interest rate panic

Fixed-rate loans have lost popularity in recent years, but fresh talk about rising rates can prompt many beginners to fix.

Koulizos says some people can get trapped in a long-term fixed rate loan say five years because they panic when rates are relatively high.

"Then in about three, six or 12 months the rates start to come down again but you have locked yourself in for years paying a higher rate," he says.

"Generally people fix at the wrong time, but fixing rates can be good especially if you are risk-averse."

Easily scared off

Some investors decide to sell up after just one bad tenant, Koulizos says.

"You can easily get rid of a tenant who's doing the wrong thing, but as soon as you sell, your asset will not be going up in value," he says.

The vast majority of tenants are not bad people, and if you treat them well most of them will respond in kind.

Renovating? Use your head

Koulizos says many people renovate an investment property with their heart, not their head.

"They renovate a property like they want to live in it, and can over-capitalise," he says.

Save the crazy colour schemes and top-of-the-range fittings for your own home. Rental properties with neutral colours are likely to attract a broader range of tenants.

Ignoring insurance

Landlord insurance is vital for property investors. It's tax-deductible and not as expensive as you might think.

For example, Carr says a policy that covers things such as malicious damage, accidental damage, rental default and legal liability would cost you $255 a year through major landlord insurer Terri Scheer.

"Some investors think 'I have a property manager - I don't need landlord insurance', but they do," she says.

Lack of patience

"Property is get rich slow," Carr says. "Some people don't believe that property prices will double again, but historically they have doubled every seven to 10 years."

"The more times you go through the cycles, the more money you are going to make."