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27 Sep 2012

MISTAKES THAT PEOPLE MAKE WHEN INVESTING IN PROPERTY

So I find myself in one of those formal black tie functions, sitting at the same table as the girl with the heart in the right place but with a rather different way of planning when it comes to her finances. She is so easy to love, with her perfect outfit and great looks. Her confidence does help too. She has a temporary high paying job, which is great. More like a secondment for a few years.

Even though she claims not to have inflated her lifestyle in the few years, it is clear to me that she did. If one goes from living in the low income side of the city to doing cosmetic surgery, owning 2 cars and investing in a home in the richest side is not, then I don’t know what is. I left out the part where the closet looks fresh, with gadgets that go with the times. I learned more about the latest models of phones from her than I have in the past year. So yes, she is living her life, her way.

I always ask myself why a single individual owns 2 cars. We live in a country where a car is a necessity, I get that. But two cars is what I struggle to understand. And we are not talking about entry level kinds of cars here. Coming to the property investment part. The home she bought is not small. She can afford it now, but when the secondment period is over, she will have to cope and I don’t think it will be possible. That’s unless she gets a really great paying job or win lottery, or get married to a wealthy and generous man. That’s a number of “unlesses”. And really decisions like this can burn one out. I have been wrong many a times about people’s business choices, especially when they take risks that feel uncalculated from where I’m standing. I tried to refrain from talking too much against some of her plans. She did not ask for my opinion. But after a short conversation, I couldn't help myself anymore.

She later mentioned that she is investing in a rental unit. At this point I was already in a state of panic. I just threw a statement against it. Something to the effect of her paying the two cars up first. But then, I am a property investor, so whatever my views against property investment for others are, are to be well presented. One may view my well meant statements as jealousy instead of advice that comes from my own mistakes and experiences. I would like to believe that my investments are well planned. I buy because I can afford to, now that I’m wiser. I have not always been like that. I bought properties I couldn't afford, invested where I shouldn't have, etc. I now buy a property that has good tenant and rental income prospects and is well priced. It feels so bad to watch people making avoidable mistakes. In the evening in question, the lady of the moment won the debate. She is not paying up her two cars, but choosing to create the fourth huge debt. You would think this would be difficult with the National Credit Act. Its not apparently. This made me think of some of the common mistakes that people make when investing in property:

  • Thinking that one cant go wrong with property investing. Its not true. You can go very wrong and lose everything.
  • Not taking the vacancies into account when doing your investment returns calculations. A property will be vacant at some point and an investor will lose money in the process. Tenants move out and in some cases trash valuable property. It happens.
  • Not knowing the total monthly costs prior to the purchase. Municipal fees alone can be such a pain.
  • Buying a property with a huge negative cash flow. If you don’t have a good down payment, stay away from the real estate investment that needs a lot of monthly contribution from you. It seems impossible to get bargains in big cities at the moment. Saving a bit upfront wont kill.
  • Treating property as a passive income and ending up with too much on your plate to cope. Even when one has a manager, like myself, they have an investment management responsibility. Its your property and ultimately your responsibility.
  • Failing to realize that maintenance takes a huge chunk of time and money. You just have to be prepared.
  • Being ignorant to property laws. You don’t need a legal degree. However knowing the basic tenant rights and landlord obligations at the very least will be wise.
  • Not taking Home Owners Association meetings seriously. How can one not care how their investment is taken care of? It makes no sense to me.

These are only a few of the mistakes that people make when investing in property.
If the lady above were me by the way, I would get rid of one car, trade the big house in for two smaller townhouses with one being a rental unit. How about you? What would you do, in her position?

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