The 5 Most Common Pitfalls for Investors & How to Avoid Them.

1. Opinion vs facts: Property growth benchmarks

Real estate agents are paid to have an opinion.  They are experts in their own patch and their job is to freely share their opinions.  If you are going to buy a home, then this is can be a source of great information on the local market. 

Many real estate agents exaggerate, and this is perfectly legal for their profession.  They need to get your attention with headlines like ‘The best house in the worst street.’  This is the dark side of their opinion because it is designed to manipulate your interest. 

However, if you are investing $500,000 in a property to rent do you want to do it based on one person’s opinion, which may be from the dark side, or do you need some facts? 

How To Avoid This Pitfall

Get reputable facts, not newspaper advertorial.

The sort of questions that we find clients need to have answered are:

  • What is the capital growth rate for this area, city or region?
  • Is it above or below average for the city, the state and the country?

Benchmark facts help you to assess the local information within a larger context.  If your investment area has a capital growth rate of 5% and the greater city has 7% then you know the right questions to ask.  

2. Unsubstantiated Capital Growth Rates?

Most so called property investment advisors only give you a snapshot of the capital growth rates. It might be a ten-year average or a 12month snapshot. If they have done a good sales job, you might assume that all is rosy and things are going up.

However, it is never good to assume without checking out the facts.

How To Avoid This Pitfall

Get trended data on supply and demand in a visual display. Then you can see if the market is going up, down or sideways.

From this you can ask better questions. Like, “What will change the current trend?”

3. Infrastructure is the Biggest House Price Growth Driver?

Most so called property investment advisors will give you a dollar value of all the infrastructure that is planned in the area. We have seen up to $19B quoted for one suburb. The number is often supplied by a research company with the implication that it is independent.

However, not all these projects have money, are approved, or will be delivered. The list may include detractors such as multiple new blocks of residential apartments that are in competition with yours for tenants. They may include new airport runways that are miles and miles away from your area. Or rail projects that are still unapproved by Government planning.

So what do you really need to know? This is hotly debated by some. We approach it from experience.

We studied 60 investors who bought $120M worth of property in 2002. We were able to evaluate what worked and what didn’t. From this we identified 5 key drivers of capital growth. We have since studied them continuously, including through the GFC.

How To Avoid This Pitfall

Look at each of these five drivers and map their trends. Are they going up, down or sideways? We look for two or three that are rising and overlap. Then we know that area has more resilience for sustained growth.

4. Misleading Real Estate Indicators?

Most so called property investment advisors do real estate indicators: like auction clearances, sales prices, and vacancy rates. These are indicators of current activity in the market.

Sometimes economic conditions are rising for so long we begin to think they are normal. Most of the so called property investment advisors that sold property in mining areas made it look like the boom would last forever. A lot of people got caught out. That really hurt some of them.

How would we have evaluated the end of the boom assuming we had investors in those areas? We would have looked at commodity futures. The futures prices for iron ore are published each day in the free press. They clearly showed there was an end to the cycle, and when it was likely to land. If these so called advice groups had trended data, their clients would have been well informed. Instead many have had to sell the family home.

How To Avoid This Pitfall

Look at the strength of each of the 5 drivers over time. This includes Government Policy. It is the indicator that can change the fastest.

Look for rising demand and falling supply. Look for areas with overlapping, and rising economic drivers. Evaluate the strength of the backing of each driver by current and forecast Government Policy.

It is from this foundation we can evaluate what is real now; what is forecast; the length of time those influences are likely to be dominant; and the likelihood of it coming to pass.

It is this depth of analysis that is presented as a foundation of information for our investors to consider. Get your advisor to present it in a standardised format to support their comparison of opportunities. This can bring out deeper questions that are of great value in their assessment.

5. Lack of Transparency

Many groups claim to give you information in your best interests however their business dealings have huge conflicts of interest. The biggest vested interest is funding. Where do their fees or commissions come from? If they are from a vendor’s agent did they declare that vested interest?

Some think they are giving you the right thing for your circumstances however it is based on their opinion, rather than an evaluation of the facts. We are back to are you taking one person’s opinion as the foundation for your decisions.

Doing a fact finder to establish the facts about your circumstances; and your appetite and management of risk. From this document, and discussion about your goals, a tailored plan can be developed for your circumstances.

Use this plan to trial check that it fits your circumstances. Do this for the area, the style of property and the timing in the market. Discuss different aspects of investment and risk to help you to get all your questions out, the ones you know to ask and some of those you might not have thought through yet.

From this foundation of information and you will be supported through a professional advice process. You want to sleep well at night knowing you have a good investment, you have contingency funding and a plan to deliver the next step in your portfolio.

What the others don’t do is deeply disturbing.  For many it is the process to get you organised to buy what they have, or have decided is good for you. 

We want you to do well and have all the information to make an informed decision.  We also want you to have an advice process to draw out all the questions about risk, management, and outcomes so you have a broader perspective from which to make a better decision.  

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