Peter Gianoli, General Manager of Investor Assist explains some of the most common mistakes you can make in property investment, but most importantly, how to avoid them.
DISCLAIMER:This information is of a general nature only and does not constitute professional advice. We strongly recommend that you seek your own professional advice in relation to your particular circumstances.
Transcript: Peter Gianoli discusses 9 common property investment mistakes and how to avoid them
Peter Gianoli: Hello, this is Peter Gianoli, the general manager of Investor Assist. Recently, at the Perth Home Show, I was invited to conduct a presentation. I entitled that presentation Nine Common Mistakes You Could Make in Property Investment and more importantly, how to avoid them. Let's listen in to the presentation now.
Property investment is simple. You just have to get three things right. You have to buy at the right price. You have to get it well-tenanted by someone who pays your bills along the way. And then you sell it for a great price at the end. If you get those three right, simple. However, in the thousands of people we've come across and helped out, people do make mistakes. And today we're going to highlight the nine common mistakes that people make. And as I say, more importantly, how to avoid them.
So let's look at mistake number one. A lot of people think property investment is a great idea. I'd like to do it. But I really want to buy something that's close to where I currently live. We ask them why and they're not really sure. Maybe it's because they think they can keep an eye on the property, or they can keep an eye on what's going on around them. But that doesn't always make sense. For example, how many people bought shares in Bond Corporation because they're West Australian, and they could keep an eye on him? That didn't go too well. How many people bought shares in Povy Corporation, if you're as old as me, so you could keep an eye on him? Well, that didn't go too well. And more recently, how many people bought shares in Ocean Fast, which is located in Coogee? You can keep an eye on them. But guess what? They don't exist anymore. So really keeping an eye on things may not necessarily be the right answer. And when it comes down to investment property, thinking about buying something within 5 to 10 kilometers from where you live may not always be the best idea.
For example, if you live in East Perth or North Perth or Mount Lawley and you're considering an investment property close to there, you need a lot of money to get involved in investment. And maybe, just maybe you could do better with that money slightly further away. Or rather than one, you might be able to buy two properties that could perform better for you. Also, if you're looking at doing a property close to where you live, you may be forced to buy something very old that requires massive renovations. And if that's your first attempt at property investment, that could be not the smartest or safest way to get started. Or thirdly, you may buy a house that's got renovation potential, or you can turn into subdivisions and build a duplex or a triplex. I can also tell you, if that's your first venture into property investment, that's also probably not the smartest thing to do first up because there's a few pitfalls there as well.
So you know what, rather than think about five to ten kilometers from where you live, maybe what you should do is think 20 to 30 minutes from where you live. Because chances are, you can get something far more affordable, you can actually get started into the property market rather than wait and wait and wait till you get a big enough deposit. And thirdly, if you get yourself a decent property manager, you don't have to drive by it every day of the week. In fact, sometimes you don't really want to see what's going on with your tenants because they may not be wrecking your property, they just may be living their life, all right? So don't be too hung up about five to ten kilometers from where you live and start thinking about actually what are the better fundamentals that we're going to discuss today. There is one good thing about buying close to where you live, or should I say, buying something that you've at least seen. Because there's a lot of people who go to seminars such as this and get captivated by our charismatic presence and rush off and buy something, and it isn't even the state in which they live. We get plenty of people who come to us and say, "Went to a seminar. Fell in love with it. Bought something in Queensland, and now I've found out it's not worth what I paid for. How do I get out of it?" A lot of people do a lot of research online nowadays, which I encourage you to do. Some people actually research a pair of shoes far more carefully than they do a property. So you don't have to buy close to where you live but make sure what you do buy; you do go and see. It's a half a million dollar investment, at least. So you probably should see it. Don't just buy it on the internet, all right? This isn't a mail order bride. This is a property. You're stuck with it for quite a while. So that's mistake number one.
Mistake number two is a lot of people get involved in property. Buy a good property; it goes up in value. They think, "You beauty. Let's sell it, take the profit, and do something with it." It's a good philosophy. Does anyone know what happens when you sell it and take the profit? Who's the first person you have to pay?
Attendee: The tax man.
Peter Gianoli: The tax man. If you've held it for longer than 12 months, you pay 50% of the profit in tax, called capital gains tax. If you've held it for less than 12 months, you pay double that to the tax man. But by all means, we should be thinking about buying a property, watching it go up in value, and then using that money. But actually what we do, what we encourage people to do, is you buy a property that's on the right-hand side. That's your initial deposit. Let's say a deposit of about $25,000 to $30,000. You buy a property; you hold it for a period of time, or you improve it. It goes up in value. Let's say maybe $30,000 to $40,000. Rather than sell it and pay $15,000 to the tax office, plus some sales commission, and maybe, because you've had a win, we might buy a new car and go on a holiday and do a few other things. Rather than do that, why not borrow against that property, use the equity, and purchase a second one? Then you've got another property working for you. You haven't had to give the tax man anything. In fact, if we gear it right, you get a little bit more back from the tax man. You haven't had any money in your fingers to let you go for that holiday. You could if you like. But you could keep a bit more control. And once you've got 3 or perhaps 4 properties working for you, and you get to my age soon and it's time to retire, and I won't be earning any money, then that's the time to sell a property because you're not paying as much tax and you live on that particular property. And then the next one and then the next one. So you understand that concept? Don't buy, get up the value, and sell. Build your equity, roll your equity, so that you can build a portfolio. That's the true way a property investor looks at life. So that’s a mistake, common mistake number two.
Common mistake number three is self-managing tenants. A lot of us think, "I could do it. I'll go and manage the tenants. Not a problem. Why bother paying a real estate agent to do something that I can do?" Well you know what, last year and the year before, you probably could have done that because rentals were so short in Western Australia that if someone didn't line up straight, you didn't have to let them into your property. It was easy. But now it's perhaps not as easy. It's a little bit harder. And when you've got a professional property manager looking after your property, they'll fill it far faster than you will. But more importantly, what happens when the person, or if the person, doesn't pay the rent? What happens if the person starts to neglect your property? You can't just go in there and strong arm them and kick them out. People have rights. And if you've been using a property manager, they know the rights. And they'll be able to orchestrate it correctly, legally, efficiently, so that anything that could go astray, doesn't. So yes, you could save money by managing tenants yourself. But if you choose a property manager carefully and you work through the checklist that we have in this book that tells you how to select a good vs. a bad property manager, then you know what? It's actually the best money you'll ever spend. It will give you peace of mind. It will let you focus on the important things, which are looking for your next property or earning the money that you earn in your own job and not worrying about tough things. About whether the dog's eating the tree in the back yard or whether it's annoying the neighbors or whether your tenants are paying the rent. Okay? So that's not a good thing to do. Mistake number three.
Mistake number four. Honestly, in Western Australia, in particular, if you're considering an investment property, then buying in a regional or a rural area is probably not the smartest thing to do. The reason you get involved in investment property is to; one is to get a tenant who pays your bills for you and your bank loan. And number two is to buy a property that's going to go up in value. What is the main reason a property goes up in value, any idea?
Peter Gianoli: Demand. Exactly, that is the reason. Scarcity. As properties run out in a particular area and if a lot of people want to live there, the prices go up. So Cottesloe, guess what? Prices keep going up, all right? No new properties there. Lots of people want to live there. Bit by bit, they just keep going up. What about Narrogin? Guess what? Property doesn't go up in Narrogin. Any reason why?
Attendee: No one wants to live there.
Peter Gianoli: No one wants to live there, generally. But more, there's no limit to the land. There's farms all around it. You can just keep adding blocks of land. And so if you're considering buying in a regional or rural area, it normally has something to do with mining. And people will say, "Oh, they need houses in Karratha. They need houses in Port Hedland. They need houses in Mount Newman. They need houses in Kalgoorlie because people need to live there. True. You can get a tenant. But is there a limit to the number of houses that could go there? Probably not so true. And do they go up in value? Well, they boom sometimes but trust me, they bust quite dramatically. So if you're a sophisticated investor, there are some good deals to be had. But if you're a normal, everyday property investor, who really wants to do the work that they do and get bang for their buck by doubling their income by getting involved in property investment, then you want simple investments. You want reliable investments. You want secure investments. And in Perth, Western Australian, metropolitan Perth, there is no better area. Stay in the metro area, you can't go wrong. Go out into the exotics, and it gets exotic. You're in for a big ride up, down, and somewhere in between. All right? So it's not a mistake you should make if you're a normal everyday property investor. So yes, land goes up, and these are the things we should look for. Will it be scarce? Is the replacement cost going to be dearer? Are there good amenities? And how is the market performing?
Next mistake is to wait for a downturn in the market. A lot of people come to us to say, "Yup, I want to get involved in property investment. But I don't want to get involved until it's at the very, very rock bottom. You ring me up when it's at the rock bottom. I'll come in and by and then everything will be sweet." Well, being involved in property for 25 years, I cannot ever tell you when it is the rock bottom. I can't tell you when it is the very top. Do you know when I can tell you? Six months ago, all right? In six months time, I'll know exactly what the market was doing today. By the way, coincidentally, I think it's around about here. It's between six and seven today. So if you're one of those people who say wait for the market to be at the bottom, you aren't going to do any better than today. However, it's not so much about where it is in the property clock. It's whether you can buy something and get a good tenant in it that will pay the bills. Then it doesn't really matter whether it's up, down, or in between, because you should be holding this thing for 7, maybe 10 years but use the money in between to buy a 2nd and a 3rd and a 4th. Because if you keep waiting and waiting and waiting for that perfect day, you won't know when the perfect day was. You need to make a step into the market. You do go into the market differently in a boom as opposed to how you go into the market at the bottom. That's a strategy. And that's a whole new talk. In fact, we talk about it in the book, and I have property investment specialists that can help you with that. But you know what? Don't wait for the bottom of the market. It's not about the timing of getting in. It's about the time that you're in the market that truly matters.
Number six. Asking a real estate agent for advice and believing it. I'm not bagging real estate agents. I happen to be one myself. But what's a real estate agent's job? You have to remember that. Their job is to represent the vendor with which they're selling. Right? So their number one responsibility is not to you, the purchaser. Their number one responsibility is to the vendor, right? To the person that's selling. So they may sugar coat the information. Just remember that, okay? Remember that when you're talking to one and they suggest to you no problem, great value, say, "Yeah, okay, maybe I'll go and do a little bit of research." Right? Okay, so what we're saying is don't... we're not bagging real estate agents. What I'm asking you to do is to set up an advisory investment team. Set up a group of people around you. This is a half a million dollar decision, plus or minus $100,000, that you're going to make. So you should get good advice. Real estate agents work for nothing. We will give you advice, and if you buy something, we get paid. So you can get advice not off one real estate agent but many of them and compare notes. Mortgage brokers work for nothing. They will go out there and find the best possible loan for you, and if you do something with them, they get paid. But they are prepared to give you advice for nothing. Just remember, if they're giving you advice for nothing, they've got a catch to it. A settlement agent will tell you what structure you should sign up in, and they'll give you that advice for nothing. The only person you need to pay for advice is an accountant. They don't do anything for nothing. But other than that, every one of us in this game will give you advice for nothing. And take it. Listen to it. But remember why we're giving it to you and then make the decision for yourself. Does that make sense? Don't get slicked into something. Don't get a one sided opinion. Get a 360-degree view of what you're considering to do. And you'll find that there's a lot of advice out there.
Number seven. Buying older properties with no potential to add real value. Now if you're going to buy an older property, there's nothing wrong with that. But you've got to know what you're getting yourself in for. We encourage people who are wanting to just build a property portfolio and not have too much to do with it; we encourage people to buy brand new properties. The reason we do that is because the tax office offers very, very good depreciation to brand new properties. The tax office says that we believe that a standard family home will depreciate in value from whatever it's worth today, let's say $240,000; it'll be worth $0 in 40 years time. So you may depreciate that home every year for 40 years at the tune of about six and a half thousand dollars. So that means you can take off your income six and a half thousand dollars every year. You don't pay it to anyone. It's just a mathematical entry that your accountant does. But if the home is brand new, you can also take an accelerated amount. This amount here, the fixtures and fitting amount. This covers things like carpet, curtains, hot plates, hot water systems, light fittings. Because the tax office believes that they depreciate over five years. So you can accelerate your depreciation with a brand new home in the first five years. So five years at $5,000 is $25,000. So if you buy a six-year-old property, you miss out on that $25,000 worth of depreciation. I know this sounds mathematical, just humour me for a moment. It's worthwhile knowing.
So if you're going to buy a second-hand six-year-old property, what discount do you need before you break even? $25,000 at least, right? You need to see what price it is and say, "Well, I want a discount of $25,000 because that's what I'm going to miss out in, in annual depreciation." Number one. If you're looking for a tenant, is the tenant likely to go into a brand new, shiny, sparkling, all appliance working home? Or a seven, eight, nine-year-old property or worse? They'll obviously go into the new one, right? So a newer home attracts tenants. And if you want to go out and do your day job and not worry about your home, a brand new home has warranties and guarantees and things that builders will continue to fix. Versus a six-year-old home, you've got to go fix it, all right? So if you can get a bargain, do it. But if it's line ball, second-hand home vs. brand new, brand new every day of the week would be the common recommendation.
Number eight. Buying a home based on the look and feel of the place. You'll be shocked at what some people decide to buy an investment property on. I love the pool in the backyard. Just got to have the home. I love the tree around the home. Just got to buy it. Did you see the artwork on the wall? Have to buy it. You don't think like that if you're a property investor. How do you make decisions as a property investor? What do you base it on? Numbers. Right? You've lost emotion when you become a property investor, right? You've now become a cold hard, calculating numbers person. So don't get caught up in any romance. Do what we like to call the 100 rule. If you follow this rule, which means give up 16 Saturdays for the next 16 weeks and visit six properties at a time, you will have seen 100 properties, and you will be an expert. How many people are going to do that? No, okay, not many. Right, well then trust someone, maybe my team, to do it for you. What's wrong with that? Nothing but we might be guiding you somewhere. So how do you check that we're not feeding you lies? Do a bit of it yourself. Just a bit of it. Get online. Realestate.com provides you really good information nowadays. No one can furphy those figures. And don't just stay online. Then go physically and look at some houses yourself and talk to some people and get some advice. But if you go and do a little bit of work, you won't be emotive about it. You'll be more rational about it. It's a decision well worth doing.
And then finally, the biggest mistake everybody makes and shouldn't, is paying too much for a property, over capitalising. If you buy an investment property and you pay too much for it, what does that do to you? It means it's harder to increase its value to get the second one or the third one, all right? So they sharper you can buy it, the better it is for you. If you come to one of these sessions and you fall in love with a property that I'm spruiking--and I'm not, by the way--in, let's say, Kalgoorlie, and I've put $30,000 on top of it to pay for my expensive lifestyle this morning and then you sign the contract and then you get the bank and the bank goes and does a valuation and the bank says, "You've paid $30,000 too much for this," where is the $30,000 going to come from? Your pocket. You can't get out of that contract. All right? So never pay too much for a property because that's not the whole idea behind this. The whole idea behind this is to buy something that looks after itself, that builds value, so you can do it again and again and again. So if you remember nothing else, this is the single most important thing you should take away today. How to work out what's the right price to pay for a property.
And it's all about the property investment continuum. It's all about this term called median house price, which we go through quite comprehensively in the book. I think it's year ten maths when you get taught median. Anyone remember what median means? Not average but right in the middle. Yes, average is slightly different. Average is if you add up all the properties, divide them by the number, you get a figure. So that means, let's say you've got 100 properties, the average could be over here or could be down there. Median is right in the middle. So if we sell 100 properties, the dearest property is up here, the cheapest property over here. And the one right in the middle, number 50, is the median, okay? You can get median house price on realestate.com. You go to any suburb, type it in, Ellenbrook, the suburbs or the properties will pop up. Have you all been on realestate.com? Properties will pop up. Pick any house you like. Click it. It'll give you all the details. Scroll down to the bottom, and it's got suburb profile. Click suburb profile and median house price will be one of the things that will come up. It will tell you what the middle price is, the median house price. Then all you've got to do is buy a property either at eight out of ten of the median house price down to two and a half out of ten, and you can't go wrong.
Okay, so the one out of ten is the knocker downer, you'd fix it yourself, own the worst house in the street. The ten out of ten is the Italian home that my parents live in that's got a lion out the front and no lawn. Cement, right? That's the ten out of ten. Italians never sell anything anyway so they never pay too much. And investors, you guys, should buy something between the three and the eight. If you're my age, pushing 50, I'm probably going to buy closer to the eight. Because I don't have the time. So I want it to be a well and truly, in the money property. If you're younger, you might go more towards the two and a half or the three. That is how you know whether you're paying too much or more importantly, if you're putting together buying a block and building a house, doing it wholesale, the two ingredients will add up well or should add up, well below there.
So when you're deciding, do we put a pool in the back yard, and the pool's going to take you over, you go, not going to do it. Or your adviser will say don't do it. So as long as you can buy within those ranges, you're in the money often before you even settle. That is the secret, ladies, and gentlemen, to building a portfolio year in, year out. So does that make sense to you? And that information's all available. Just be careful, though. One hint of caution. If it's in an area where there's not many statistics, like there weren't many sales, and, which happened, the median in house price could be some odd number. So if it's in Henley Brook, as an example and there's only been 20 things sold and one of them happened to be a 10 hectare farm, guess what? The median will get swayed quite considerably. So statistics are good. Realestate.com is good. But maybe you should get a specialist to check the statistics, to make sure you haven't been blindsided. Not that anyone's out to deceive you, but statistics can paint the wrong picture on occasion if you don't know how to read them. In actual fact, there's more than nine common mistakes. There's closer to 20 of them.
So that concludes the presentation I made at the Perth Home Show. If you'd like a copy of information on Nine Common Mistakes You Could Make In Property Investment and more importantly, how to avoid them, please go to our website, Investor Assist. And go to the link on this screen to download your copy now.