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.
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 property 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.
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.