One of the main reasons I started writing about money was to share the many mistakes I have made in my ongoing journey to wealth.
I’ve mentioned before that I purchased my first investment property at 24.
By jumping in at such a young age, I had a very steep learning curve.
Investment fundamentals hardly ever change, so I think sharing my real estate investment mistakes may help a new investor avoid making the same ones.
My Real Estate Investment Mistakes
Mistake 1: Not buying earlier
In 2002, I was working a permanent full-time job.
The house I had spent my early childhood in came up for sale.
It was purely emotional, but I loved the house, a 1920s bungalow in an up-and-coming area.
My parents purchased it as their first home in the late 1970s for $15,000.
They sold it in 1995 for $87,000, and seven years later, the asking price was only $4,000 more.
I met with a mortgage broker to discuss finance.
My income from my job at a cardboard box factory – not joking – was enough to service the loan, and I intended to get flatmates to help with the payments.
For some reason—which I still cannot pinpoint—I didn’t pursue it.
I didn’t even look for other smaller properties. I just walked away.
I’m chalking it down to being 20 years old and wanting to enjoy my life – then.
But I still regret it.
The house is now valued at between $290,000 and $320,000.
Had I gone ahead with the purchase and paid the minimum on a 30-year loan, I would have around $250,000 equity now.
I could have been very close to early retirement now had I purchased my first house in 2002 and another couple in the years preceding the boom times of 2004-2007.
Unfortunately, it wasn’t until 2007 that I became interested again (here are some of the books that piqued my interest).
By this time, I was living in Sydney, earning $45,000 per year working in the head office of a large travel company.
My partner (now husband) earnt about $60,000 per year.
We lived in a share house with very low expenses.
We were the bank’s dream clients.
The world was amid an enormous bouncy credit bubble; property prices were rising faster than ever before.
Developers worldwide were accessing easy credit to build overinflated homes for people who had never been so rich.
I began reading anything I could find on the topic.
First, I borrowed every property investment-related book from the library.
Then, I started buying books.
In those crazy days, many ‘property education’ services charged thousands for access to their ‘knowledge’.
I reasoned that book purchases were education costs—a couple of hundred dollars on some perspective-altering books seemed like a solid investment.
One of the most common themes I read about was Analysis Paralysis, the act of overthinking something so much that one never takes action.
I had a few grand in the bank, a trusting partner and youthful optimism.
I was ready to take action.
No analysis paralysis for me.
Mistake 2: Negative gearing my first property
The opportunity to take action came when my parents considered selling a non-performing rental unit.
They had chosen a bad property manager and were losing money.
As with many first-time investors, they were nervous.
But Dad, with his ever-hopeful and savvy business eye, saw a way to keep it.
He offered to sell me ⅓ and my brother ⅓, and they would keep the remaining share.
With ownership split between 3, the monetary risk was lower, and they would be helping their children to become property owners.
We had finance organised at the agreed price (and market value) of $60,000 for a ⅓ share in a $180,000 property.
My partner and I had to part with a 10% deposit of $6000 and were left with a loan of $54,000.
Through one of his contacts, Dad found a new tenant willing to pay the market rent of $230 per week, which yielded a gross yield of 6.6%.
I was so desperate to buy a property that I didn’t consider the numbers.
With interest rates around 7%, the property was negatively geared from the outset.
My tax bill provided some relief, and I earn a decent income with a lot of disposable cash, so we considered the required top-up (around $200 per month) as forced savings.
Still, it’s not something I would recommend to someone buying their first property.
Why?
Negative gearing plays on the assumption that the property value will grow.
This is speculation, as growth cannot be guaranteed.
By having to top up to meet the outgoing costs, you are effectively subsidising a non-performing asset in the hope it will eventually net you a capital gain.
In some markets—usually low-yielding markets with high growth —this can be an excellent strategy, but in my case, it was simply a case of not doing the correct due diligence.
Whilst growth on the property kept pace with inflation during the time we owned it, the extra expense affected our ability to borrow for further purchases.
Still, three months and a savvy mortgage broker later, we were again approved for finance up to $150,000.
Mistake 3: Not thoroughly researching economic fundamentals
With some idea of what my limited budget would buy, I booked flights to New Zealand and organised a drive to the West Coast of the South Island.
At that time, resources were producing a lot for the region, employment was high, and wages for mining staff were leading the country.
I had emailed a real estate agent, and she arranged to show me some of her listings.
I eventually decided on a 3-bedroom wooden bungalow for an asking price of $139,000.
After some negotiation, the sale price was agreed at $128,000. The market rent at the time was $195 per week for a gross return of 7.9%
Gross return: Annual Rent/Purchase Price x 100
At the time, I was delighted with my purchase.
The house was easily rented and managed by the same agency that had sold it.
The rent slowly rose to $230 per week.
Then, a couple of years after the purchase, the second largest employer in the town closed, taking with it 120 jobs, a huge deal in a town with a population of 5000.
Had I done my research, I would have known about the plant closing as it had been proposed for 5 years.
In 2014, the most significant employer – a coal mine – made 187 people redundant.
Although I am fortunate that my tenant does not work for the coal mine, I am nervous.
If the current tenant moves out, I will likely have to drastically lower the rent to secure a new tenant.
Mistake 4: Entrusting people who didn’t have my best interest at heart
With two properties under my belt, I was ready to buy again.
It was March 2008; I had a small pay rise, and finance was approved this time for up to $150,000.
I found a one-bedroom unit close to Christchurch’s city centre that had been relisted after the first offer fell through.
The asking price was $129,000.
As the unit was small (40sqm), my bank would only lend 80% of the purchase price, so naturally, I wanted to get it as cheaply as possible.
I asked the seller’s agent what price the offer fell over.
Yes, that’s right, I asked the seller’s agent.
The same agent would be receiving a commission from the seller.
The agent had no notion of helping me.
They told me the offer was in the low $120s. So we offered $121,000, and it was accepted.
Of course, it was accepted. The agent was under no obligation to be upfront with me; he likely told me the figure both he and the seller wanted to achieve.
Oh man, I felt like such a fool after that.
After closing the sale, I sourced a property manager to secure tenants.
I’d been in contact with her regarding another business she ran, and I felt like we had established rapport.
She quickly rented the unit, and I waited for the rent to appear in my bank account on the first of the month.
It never came.
I emailed her, and she reported a glitch in the system.
I waited and waited – anxiously sending emails.
After being told the money was coming for nearly 7 weeks, I finally took action and replaced her.
My new property manager contacted the tenant directly to instruct them to pay the new rental agency.
The tenant was devastated to learn that the bond she had paid (equal to four weeks’ rent) was never lodged with the correct authority and that the property manager had also run off with her rent.
I was around $1500 down, which really hurt at the crucial beginning of a new real estate investment purchase.
Thankfully, my new property manager proved trustworthy and reliable, and I used them for many years.
It wasn’t all bad news.
Since early 2008, we have purchased three more investment properties and lost two due to irreparable damage caused by the Christchurch earthquakes.
Both were fully covered by insurance.
Values have increased steadily, and rents have remained stable on all but our Christchurch properties, which experienced a massive increase in rental values after the earthquakes.
I’m unsure if further real estate investment is in our future, as we could live a frugal but comfortable existence on the rents of our current portfolio if the mortgages were cleared.
That said, if an excellent cash-flow opportunity came my way, I’d find it hard to resist.
(Update: I did! Read the case study here.)
Have you invested in real estate? And property investment mistakes or wins you’d like to share?
Note: This blog post was first published in 2015.
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