Common Mistakes Investors Make
Counting on low interest rates
Currently in Australia, we have some of the lowest interest rates we’ve seen in years, if not decades. Variable rates are currently around 5%, and fixed rates can be found at the lower than 5% mark. In order to secure a larger loan, and pay mortage debts quicker, investors are using the incredibly low interest rates to their advantage. This can come at a cost though.
Often, investors are too reliant on low interest rates, without factoring in that the rates are likely to rise. The historic average for interest rates is that of around 7.5-8%. If you are currently paying a 5% variable, you could potential have to jump a huge 50% on your current repayments. Relying on currently interest rates could mean you are over extending yourself financially in the future.
My advice is to take advantage of low interest rates, but to stress test yourself and see how you could financially handle a 8% interest rate. This will ensure you know you can afford you investment now, and in the future.
Not having a clear strategy on your investment
Of course investing in real estate can be a fantastic way to cushion your wallet and make a clear path for a comfortable lifestyle. But not having a clear strategy, can make your property work against you.
Countless times, I have seen investors starry-eyed about the potential a property has, and how it’s going to make them lots of money. They jump in too quickly without realizing all investments come with risks and potential issues. Imagine this scenario; there’s a huge development opportunity. It’s a subdivision, and once completed, will generate several hundreds of thousands of dollars in instantaneous equity. The investor is so consumed by the dollar signs they can see in their eyes, that they over stretch themselves to be able to finance the development – even remortgaging their own home.
The project puts stress on their finances, relationships and even their sleep at night because they are so worried about money. While this might be a good, or even great investment opportunity, it mightn’t be worth the pressure it puts on them and their personal situation. There are better ways to invest, and making a clear and honest picture of where you currently stand financially and where you hope to be in 5,10 or 20 years will help you to develop wealth, without sacrificing your current lifestyle. Without this strategy, you are gambling, as it is near impossible to make clever financial decisions when you’ve no idea if this opportunity will lead you closer to your goal.
Buying out of fear
I’ve noticed a trend of investors buying out of fear that they will miss a rare and incredibly profitable opportunity. There are certain suburbs in Melbourne, that are becoming more and more overheated. People are effectively paying too much for a property because of this urgency to buy essentially anything to get in the market.
They are going from looking for a positively geared two bedroom apartment that suits their investment strategy, to looking for anything they can grab at any cost because the supply and demand imbalance has them looking like a deer in headlights. It is crucial at times like this, to remember your rules and stick to your strategy in order to stay focused on what you are looking for.
If the market in one area is too over heated, shift your focus and look somewhere else. With hundreds of suburbs in Melbourne to choose from, there are always opportunities out there waiting for you to make some money from!