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1. HEART OVER HEAD

When buying a home, about 90% of your purchasing decision will be based on emotion and only 10% on logic.

This is understandable, as your home is where you’ll raise a family. It’s your sanctuary.

When it comes to investing however, letting your heart rule your buying decision is a common trap to be avoided at all costs.

Allowing your emotions to cloud your judgement means you are more likely to over-capitalise on your purchase, rather than negotiating the best possible price and outcome for your investment goals.

You should always buy an investment property based on analytical research.

Will it provide the gains and returns you require? It is in the best location to attract quality tenants?

Will it appeal to the owner occupier market that sustains property prices in the long term?

By answering these questions, rather than buying a house because you loved the curtains or thought it would make a good holiday retreat, you’re thinking based on financial gain rather than personal feelings.

And at the end of the day, investing is all about the economics, not the emotions.

“Seventh, focus on income rather than capital growth. The more cash you can actually collect monthly, the better your chances will be of buying elsewhere. Focus on the cash and the capital growth will look after itself.

“Sixth, unless you face financial disaster, do not sell. The ancillary costs of buying and selling are high – you will have capital gains tax (CGT), agent’s fees, transfer and conveyancer’s fees – all of which will eat into your profit.

“Fifth, accept that your own home is part of your portfolio. Too often, as salaries increase, so does the desire for a bigger and better home, resulting in huge bond repayments having to be paid. Rather have a moderate home and save by having a small bond here and use the spare cash to buy elsewhere where you will earn rent.

“Fourth, diversify your portfolio: Try to invest in both freehold and sectional title residential property, as well as small commercial and industrial units. Try also to avoid being in one area. The markets fluctuate: if you are spread wide, the rises and falls will be cushioned.

“Third, do not rush this process: Avoid the temptation of buying many highly bonded properties. Rather buy one and gear it correctly before you move on to the next purchase. Later, as your income increases, it may be possible to buy more than one property at a time.

“Second, set yourself the goal of building up a property portfolio which you expand steadily. Do not sell your investment property, even to buy another.

“First, accept that property is always a long-term investment with ups and downs. If you are out for a quick buck, you will not find it in property.

Bigger is not always better

As your property size and square footage help to determine your tax rate, an acre or more of land really isn’t necessary. You’ll mow it (or pay to mow it) and pay extra taxes for it, but beyond increasing overall property value, it won’t do much as far as rental income goes unless you have plans to build an addition or another rentable structure on the lot.

Neither will room size. As long as you meet the minimum bedroom requirements required by the township or city, more square footage per room doesn’t necessarily help. 4 small- to medium-sized bedrooms may actually produce better income than 3 large bedrooms.

One of our rental properties featured a lovely but immense bar in its finished basement, which we immediately earmarked for removal. The small extra initial cost has paid off in the long run, especially when we decided to rent to college students. If our goal was to flip the house, we might have left it, but for our intended use it was more of a liability.

 

Stay close to home

Absentee landlords tend to find out about and resolve problems less quickly, which in turn can make them bigger, more expensive problems. Municipalities are none too fond of absentee landlords, which can also lead to bigger, more expensive problems, like fines and even citations.

Twenty minutes or less is an ideal distance; it allows you to appear involved and available to your tenants and local officials, be a visible part of the community, and respond rapidly when help is needed.

One unfortunate landlord I know attempted to hold down a busy job in Manhattan and found a startup company while managing several properties over an hour away in New Jersey. He invested a chunk of money to fix up his properties, and everything seemed fine until a minor plumbing problem occurred in one of the houses. It was an easy fix involving a five dollar part, but this landlord was late to respond. He didn’t have much luck with the local plumbers he reached out to, and more time passed. One day a plumber finally called back after visiting the house and angrily exclaimed that he patently refused to work under those conditions.

What conditions, you ask? In a house of eight tenants, raw sewage had been pouring into the basement for over two months. The muck was knee-deep, the stench was abominable, and yet the tenants, college students, had never said a word. The house was in foreclosure within the year.