5 Typical Novice Mistakes

Mistake 1: BUYING THE DWELLING NOT THE LOCATION  

Buying an investment property is a business! It requires that you assess it in a business-like manner. Understand that you really don't want a dwelling on the land (because it declines in value) but you need a dwelling (for taxation reasons). So, don't get "hung up" on the peripheral features of the dwelling. 

Mistake 2: NOT SEEKING EXPERT ADVICE 

It is hard to go wrong with property, but it is easy to waste a lot of your potential through poor legal, finance, taxation and property decisions: the answer - get expert advice. 

Albert Einstein said "experience is knowledge, everything else is just information." Ensure that the professionals you are using are themselves property investors. 

Mistake 3: NOT HAVING A DEBT MANAGEMENT STRATEGY 

The Australian Financial Review in "Smart Money" (June 2002) said "Debt can be the magic pathway to success - if you know how to use it." And, there's your key - not the debt, but the management of it. 

You want experienced, specialist advice from experienced specialists who know about the "buffers" and the "safety nets" you should employ. 

Mistake 4: OVER-LOOKING THE IMPORTANCE OF THE GROWTH RATE 

Phil Dolan, head of Macquarie Investment Management, told the Australian Financial Review "Few investors are aware just how important asset allocation decisions are. It might come as a surprise to many investors that actual investments you pick within asset categories are much less relevant than a decision to be exposed or to increase or reduce an exposure to an asset sector." 

So, you see, buying the nicest dwelling you have ever seen is of little value if it is in the wrong location. What is the key to the right location? - house-hold formation, which, for our purposes means population growth. No population growth means no growth in demand which means no real price growth. 

Why is the growth rate so important? - because small differences in the compound growth rate makes a massive difference to the end value of an asset, when measured over 20 plus years. 

Mistake 5: NOT GETTING THE FIGURES RIGHT 

You won't get the chance to enjoy your superior capital growth rate if you can't get the cash flow right! Over eighty per cent of Australians are now paying tax at the marginal tax rate of thirty per cent (31.5% with the Medicare levy). At this marginal rate an average three storey walk-up unit or an average house will break-even at a borrowing rate around 4.5% (assuming a 5% gross yield and 100% borrowing). So, you would pay 68.5% of the cost in excess of 4.5% (the tax man pays the 31.5%). For example - 9.0 - 4.5 = 4.5 X 68.5% = about 3% X purchase price = $/year/52= $/week. 

Naturally, if the units are not walk-up but have expensive lifts this will change the figures. 

This calculation is only to be used as a "rough" check of the figures you are given by the seller. Before you make a decision, do a full calculation using the figures that are supported by evidence.

Article Source: http://EzineArticles.com/?expert=Neil_Handley

About the writer -----------------------------------------------------------------------------
Neil Handley graduated as a Bachelor of Economics and Accountant. After some 20 years as a stock broker Neil turned to property development. He then acquired a controlling interest in a property development company listed on the stock exchange and became CEO. He has been involved in developing residential subdivisions, industrial subdivisions,shopping centres, office buildings and medium density residential dwellings in Sydney's north shore, Northern Districts, Parramatta and Liverpool areas and on the Gold Coast, Queensland. One office building was sold to the AMP for $25ml. Neil's company advises on building wealth via property.
Go to http://www.specialstrategies.com .

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