Updated: Mar 11, 2021
Mistake 1: Not Buying Below Market Value
Buying BMV will you give instant equity and a buffer if property prices were to fall further. It also allows you to re-mortgage and remove your initial deposit as soon as circumstances allow, thereby significantly reducing the risk of losing money in the short term, as you will have left none of your own money in. 0% risk on finds, infinite ROI.
With this concept (which works in any market) you do not need property prices to increase in value as you are making money straight away from the discount and locked in profit.
Mistake 2: Underestimating the importance of cash flow
Not treating your property acquisitions as a business is a recipe for disaster. We know the old adage that cash flow is king and without a healthy flow of cash your property business will fail.
Now, we are not only talking about having good cash flow properties which is essential but also having a buffer of mortgages payments and an extra for expenses, to counter interest rate rises which can put a dent in your monthly profits or if the tenant leaves and you have to fund the void periods. What if you have an unexpected cost such as having to replace a boiler? If you are starting out, this can be tough, we know that. However, without having cash reserves building a successful property business can prove extremely difficult.
However, all is not lost. If you do not have cash reserves set aside, then perhaps you could find a JV partner who has a cash sitting in the bank [getting no interest], who can have an equity share in the property You can become very wealthy by utilising and reinvesting using other people’s money.
Remember the ‘number of properties you own is vanity, the cash flow you make is sanity and the cash you got in the bank is reality’.
Mistake 3: Buying for Capital Appreciation [Growth] and not Yield
Many investors base their entire business model on capital appreciation and underestimate funding the shortfall in running their property portfolio. This is a very big mistake and a very high risk strategy to be avoided at all cost.
It was the strategy that financially ruined many people 2001 – 2007. All things being equal, we buy our stock on the basis that property prices will never rise, meaning our model is based on instant profitability: income from rent NOT just growth. This mentality helps us make sensible decisions that the figures and the investment will provide a positive income. Capital appreciation is seen as bonus.
Sure, we all know property prices virtually double every 10 years, but as portfolios grow shortfalls can become out of control if they are bought on a growth only model.
Never ever buy with emotions. Remember, an asset is something that puts money in your pocket and a liability is something that takes money out of your pocket. You should be turning away more deals than you buy, making sure the yield is good, and factoring in ALL of your cost.