4 Wealth-Crushing Real Estate Investment Mistakes to Avoid

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Mistakes made in real estate investment
One of the main reasons I started to write about money was to share the many mistakes I have learnt in my ongoing journey to wealth. I’ve mentioned before that I purchased my first investment property at the age of 24.

This blog is about my current and future financial position so I’m not going to rehash every purchase I’ve ever made. That said, by jumping in so deeply 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 to refrain from making the same ones.

My Real Estate Investment Mistakes

Mistake 1: Not buying earlier

In 2002 I was in 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 character bungalow in an up-and-coming area. My parents had purchased it as their first home in the late 1970s for $15,000. They sold in 1995 for $87,000. Seven years later the asking price was only $4,000 more.

I met with a mortgage broker to talk about finance. My income 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. I would have around $250,000 equity now had I gone ahead with the purchase and paid the minimum on a 30 year loan. 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.

mistakes made in real estate investment
Just some of the growth I missed out on by not purchasing earlier – my first real estate investment mistake.

Unfortunately, it wasn’t until 2007 that I began to get 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 in the midst of an enormous bouncy credit bubble, property prices were rising faster than ever before. Developers all over the world were accessing easy credit to build over-inflated homes for people who had never been so rich in their lives.

I began reading anything I could find on the topic. First I got every real estate investment related book I could find from the library. Then I started buying books. In those crazy days there were many ‘property education’ services charging thousands for access to their ‘knowledge’. I reasoned that book purchases were education costs – a couple of hundred on some perspective-altering books seemed a solid investment.

One of the most common themes I read about was Analysis Paralysis – the act of over-thinking something so heavily that you never take 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 were considering 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. At the agreed price (and market value) of $60,000 for a ⅓ share in a $180,000 property we had finance organised. Dave 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 market rent of $230 per week for a gross yield of 6.6%.

I was so desperate to buy a property that I didn’t fully consider the numbers. With interest rates around 7% at the time, the property was negatively geared from the outset. There was some relief in my tax bill and I earnt 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 this can be an excellent strategy – usually low-yielding markets with high growth – 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 my 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 me 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 been in contact with a real estate agent by email and she organised to show me some of her listings. I eventually decided on a 3 bedroom wooden bungalow with 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 rented easily and managed by the same agency who had sold the house. 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 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 largest employer – a coal mine – made 187 people redundant. Although I am very lucky that my tenant does not work for the coal mine I am nervous. If the current tenant moves out it is likely I will have to drop the rent drastically to secure a 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’d just had a small pay rise and finance was approved this time for up to $150,000. I found a one bedroom unit close to the city centre of Christchurch that had been re-listed 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 the unit as cheaply as possible. I asked the sellers agent what price the offer was that fell over. Yes that’s right, I asked the sellers agent. The same agent that would be receiving a commission from the seller. The agent had not one 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 on 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 until the first of the month for the rent to appear in my bank account.

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 4 weeks rent) was never lodged with the correct authority and that the property manager had run off with her rent as well. All up I was around $1500 down which really hurt at the crucial beginning period of a new real estate investment purchase. Thankfully my new property manager proved to be trustworthy and reliable and I used them for many years.

It wasn’t all bad news

Since early 2008 we have purchased a further three investment properties and lost two due to irreparable damage in the Christchurch earthquakes. Both were fully covered by insurance. We now hold a relatively solid portfolio consisting of three single family homes and the two-bed duplex we are living in. Values have increased steadily and rents have remained stable on all but our Christchurch properties which experience a huge increase in rental values after the earthquakes.

I’m not sure if further investment in real estate 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.

Have you invested in real estate? And property investment mistakes or wins you’d like to share?

Watch out for these real estate investment mistakes. I've made all of them and I'm sharing my experience so you don't have to. If you're getting started with real estate investing, make sure you check out this post. property investment mistakes | real estate investment mistakes

12 thoughts on “4 Wealth-Crushing Real Estate Investment Mistakes to Avoid”

  1. We bought a condominium in a college town while we were in law school. We made a good deal of money off of appreciation (bought at $67k, invested $6k in improvements, sold 4 years later at $95k). I tried to sell it earlier but couldn’t find a buyer at the price I wanted to I rented it out (and had a nice positive cash flow for a while). Since we had a 15 year loan, we got a big chunk of cash from the place when we sold it ($30-40k I think).

    But I’m done with real estate I think. We only own our current single family house valued around $150k USD. It’s paid off, so we only owe taxes, insurance, and utilities plus routine maintenance costs (though we DIY the small stuff).

  2. Investment fundamentals hardly ever change, yes that’s true. And thank you for sharing the mistakes of investing it help to the new investor to refrain from making the same ones.

  3. Hello Emma,

    Seriously, reading your post made me remember my old days when, I just entered in the
    real estate business.
    Many people would find this similar to their mistakes, which they have done in the early stages
    when they entered in this world.

    Not buying early made me to remind this.
    As real estate is just like gambling. One day you win a jackpot and the other day,
    you might loose what you all have.
    The prices, of the houses are just gaining peak. Never comes down, and this just happening
    withing a year. The prices just raise to about double within a year.
    Does any business gives us that.
    But these are the only silly mistakes that we have done and when we realize, time has flew away.

    Thus the fundamental of investment hardly changes.
    Good reminder post for them, who are planning for a real estate business or investments.

    Thank you for the share.
    Shantanu sinha

  4. I am a heavy investor in Real Estate and i do everything myself. This is very helpful. Your tips will make me more efficient and would really help in my time management. Thank you for this post!

  5. Hello..!!!
    Definitely, small mistakes in real estate business leads to disastrous results. I would always suggest that before stepping into real estate business, you should take suggestions or consult an expert who can guide you through the whole process.
    Loved this post buddy..!!!

  6. Seriously considering my first real-estate buy/ball-and-chain investment in Melbourne and this post is so so helpful. Very generous of you for sharing – amazing work NZ!

  7. I also regret not trying to get in to the property market 15 years ago. Or even 10 years ago. I really should have bought as soon as I had a job – even if I had tenanted it out fully rather than living in it.
    At the time, the suburb I was living in, houses were $100k/bedroom and you could get 90 – 100% finance.
    Now, those same houses are more like $150+k/bedroom and you have to have at least 20% deposit as a live-in, or 40% (I gather) to invest.
    That said, if I had bought then, we would be living in that house and suburb now since we have a kid, and would never have lived in the lovely wee place we have instead!
    We are instead looking at a holiday rental as an investment – something we will regularly use, and can rent out to help pay the bills, since our main mortgage for our personal home is under control and only needing another 5-6 years to pay off.
    In a few years we’re going to look at buying a central city apartment – for us to live in. We’ll decide at the time if we want to sell or rent out our current place. We dont want a large property portfolio though.

    • It sounds like it all worked out OK, Amelia. My regret is simply the capital gain we missed out on. If my children are savvy enough to buy property young, I will make sure to encourage them and let them know the benefits and disadvantages. In my case, it was completely my own initiative and my parents didn’t have the knowledge to push me on it. Had they, I probably would have purchased the house.
      I do love your idea of buying a central city apartment, we would love to live in the CBD of Christchurch. It’s becoming an amazing place to be, but I’m not sure I could pay 500k for an apartment.

  8. Mistakes happens for learning.Thank you so much for sharing.I will try my best not to make such mistakes.Waiting for your next article.Keep it up man!

  9. You should be commended for having the courage to make your first real estate investment at the age of 24, Emma. And thank you for sharing your experiences. Hindsight is all 20/20, but there is some serious learning that happens once we are able to review the pivot points and opportunities that we let get by us. Thank goodness for that insurance. That’s a big part of the optimal investment formula, being insured against disaster. Your portfolio of properties looks great moving forward. Congrats. And keep up the great writing!

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