The 6 biggest mistakes to avoid when investing in property

1. Not knowing your investment objectives

If you don’t know your destination, how can you expect to get there?

The first port of call is to clarify exactly what you are trying to achieve by investing in property. You need to be specific about your investment goals and why they are important to you.

• Are you looking for additional income now or for the future?
• Do you want to have one asset to manage, or would you rather diversify the risk and own multiple cheaper properties?
• Are you really looking to achieve financial security, or do you just want to be able to tell your friends that you own multiple properties?

Answering these sorts of questions are paramount to creating a robust investment strategy and will determine the structure you purchase in, the kind of properties you purchase and even whether you eventually sell the properties.

2. Trusting emotions over logic

When you buy a property to live in, your emotions tend to kick in because you want it to feel like home. However, investing in property requires a whole new perspective. If you let your emotions overrule property investment logic, you are almost certain to lose money.

We have heard many horror stories of other investors purchasing a property because of a ‘gut feeling’ or because they ‘just love the property!’ And even though purchasing your first investment property can be exciting, the decision needs to be grounded in an objective measure – does it actually achieve your goal.

You need to do your research and find data to back-up your gut feeling:

• How much are other properties in the area selling for?
• Who will be your tenants and what rent can you achieve on the property?
• Is there good rental demand and can you guarantee that you will always be able to find good tenants?
• Have you included all the costs associated with the investment?
• What is the likely mortgage rate you will be able to get?
• Have you factored in tax?

And only if all of it stacks up, should you proceed with putting in an offer. As an investor, it is important to never fall in love with a property, only with the numbers!

Top tip: Run the deal by someone who is not emotionally involved to confirm it is as good as you think it is. That can be a trusted friend or family member, another investor, or even a mentor.

3. Buying in the wrong location

The location of the property you purchase is key to attracting the right kind of tenant and ensuring you get a good growth in the value of the property, over time. As a result, it is fundamental to the decision to invest.

Often, we find that first time investors typically look to invest in the areas they know best, such as where they currently live, or where they went to University, because they feel like ‘safe’ options. However, depending on your investment goals, these might not necessarily be the most productive options for you.

You should study the entire market before making the decision to purchase. You’ll need to look at:

• Which town or city to invest in
• Whether to invest in the city centre, or further afield
• Whether to invest in the cheap properties, the most expensive ones or the ones in the middle
• The tenant type and risk pattern
• The distance to schools, supermarkets and parks
• The local public transport links

Once you have been able to gather this information and confirm that your chosen location meets your investment objectives, then you can consider purchasing a property.

4. Not choosing the right financing option

One of the benefits of property investment is that you get to invest with borrowed money, in the form of a mortgage. While it could help to increase your returns, if you get the financing wrong, your profit could easily disappear!

When you invest in property using a mortgage, the mortgage interest payments are likely to be your biggest monthly outgoing. But getting the best financing isn’t simply about getting the lowest interest rate. There are many other considerations to take into account. For example, if you are likely to want to sell or restructure your mortgage in the next couple of years, the savings from a lower interest rate could quickly unravel with early repayment charges. Likewise, some lenders require you to use specific ‘panel’ solicitors, which may be more expensive.

In our opinion, it is best to always use a whole of market buy-to-let mortgage broker with experience of purchasing properties in your chosen area AND of dealing with someone in your particular circumstance. This knowledge will help you avoid costly financing pitfalls and ensure you get the best mortgage product you can.

5. Wanting to manage the property yourself

Purchasing the property is half the work but finding and managing tenants can be a job in itself. You have to:

• Put up an advert
• Show the prospective tenants around
• Vet the applicants
• Carry out right to rent checks
• Complete an inventory
• Keep on top of rent payments
• Manage maintenance issues
• Organise trades people as required
• Carry out regular property inspections

You may think you’ll save money by managing the property yourself but, in reality, it takes up a lot of time and getting it wrong can land you with a big fine or even put you in prison! Managing a BTL is no joke, so in our opinion, it is best to find a great property management company that can take all the headache away from you.

This way, you can leave the day-to-day hassle of running the property to them, while you concentrate on enjoying the benefits of your investment.

6. Poor financial management

Managing your BTL property finances can be tricky, especially if numbers aren’t your bag. You will have to reconcile on a monthly basis:

• Rental income
• Mortgage interest and capital repayments
• Management charges
• Maintenance and repair expenses

And if that wasn’t enough,, you’ll also need to account for tax!

It can start getting messy and we would suggest using a good accountant to keep on top of it. They can keep you up to date with how your investment is performing and also help you minimise any tax liabilities by taking advantage of expense allowances.

It is always a good idea to forecast your cash flow and set aside a fund for any emergency maintenance that needs to be carried out. It might also be useful to model the impact of a tenant moving out on the rent received so you can make decisions about rent increases etc.

Start as you mean to go on

We all learn from mistakes, but it’s less costly to learn from other people’s mistakes than to repeat them yourself. By planning and avoiding these 6 mistakes, your property investment journey should be a lot more fruitful.