On the face of it, investing in property seems simple.
You buy a property, let it out, sit back and enjoy the monthly income. Or perhaps you buy, renovate, and sell again to bank a quick profit.
But in reality, it’s not quite that straightforward. It’s easy to make mistakes that can harm your returns.
This is especially true for new investors, but even old heads can make the wrong choice occasionally.
So, in this post, we’ll take a look at the 7 most common property investment mistakes we see each day, and how you can avoid them.
Mistake 1: Lack Of Research & Due Diligence
We’ve put this at number one as it’s probably the mistake we see most often.
Many property investors simply don’t spend enough time researching a location or the conditions of the local property market. And even once they’ve found an investment opportunity, they’ll forget to follow a careful, comprehensive due diligence process.
And yet, it’s really easy to do the basics.
When it comes to research, for example, we recommend:
- Reading the latest property news, particularly anything about the area you’re looking at. YouTube videos can also be useful.
- Using platforms like Rightmove to find out more about local property prices, rental rates, the number of properties available for sale and rent, and how many have been sold and let recently.
- Accessing the latest industry reports from the likes of Hometrack, JLL, Knight Frank and Savills. These reports can give you an insight into market performance, trends, and long-term predictions. Again, anything that covers your target location is valuable.
Meanwhile, your due diligence should include, at the very least, fact-checking all the numbers given to you by an estate or letting agent.
We’ve seen investors take a hit before after an agent has said they’ll be able to let a property for a certain amount, only to find it struggles to attract a tenant at that price after they’ve bought. When dealing with fine margins, this could be the difference between making a profit or a loss.
Fact-checking is simple enough. Look for comparable properties nearby, ideally on the same street or estate. What rents do they achieve? How much do they sell for? What kind of demand do they attract?
You could even get multiple opinions from local agents and experts or speak to other landlords.
Mistake 2: Emotional Investing
Letting emotions guide your decision-making is a big no-no when it comes to any type of investment, including property.
A common example is paying over the odds for a property simply because you really like it. This is easy to do: you view a property, you form an attachment, but you end up in a bidding war and paying well over the market rate to “win” the auction.
You must remember that you are not going to live in the property. It doesn’t matter if you like it or whether you would live there yourself.
You are there to make a return on your investment. The only thing that matters is whether the numbers stack up: will this property generate an excellent return?
Think of property investing as a business. Take the emotion out of it and make logical decisions based on data. Set strict pricing thresholds and stay disciplined, never go over what you were willing to pay.
Mistake 3: Under (And Over) Diversification
Property investment carries risk but you can mitigate against it by diversifying – buying in different areas, opting for various types of properties, targeting a range of tenant profiles, and so on.
Yet, under-diversification is a common problem.
Landlords will often hone in on one particular location and one type of property, and build an entire portfolio of the same investment.
Not only is that a risk if the local market were to suffer, but it’s potentially a missed opportunity. For example, let’s say you’ve focused on student HMOs in Liverpool. While this has been successful, adding in a buy-to-let in Manchester could reduce your risk and lead to more profitable returns if the growth of Manchester’s property market outpaces Liverpool’s.
The flip side of this is over-diversification. Research shows there isn’t much difference between owning 20 and 1000 stocks in terms of risk and performance. The same is true for property: if you were to buy a property in every city around the UK, after the first few cities you would have maximised the benefits of diversification. Any further purchases would only increase the time you need to spend on admin and management.
Mistake 4: Chasing Performance
If you’ve had a property that has performed well for you previously, you will naturally want to try to repeat that success.
But that can be a mistake. Undoubtedly, the market will have changed since you made your original investment, and the same upside potential may no longer exist.
Imagine you bought a property 10 years ago for £120,000. The local area has benefitted from various regeneration projects in that time, and the value of your property has increased significantly as a result – perhaps it’s doubled to £240,000.
So you go back to the market, looking to buy another property and repeat the same trick. Except this time, it’s much more expensive and the rapid growth of the last 10 years begins to slow down, moving more in line with national averages.
While this wouldn’t necessarily be a bad purchase, you’re still chasing a level of performance that is now more difficult to achieve.
If you decide to go ahead, you need to be very confident that the fundamentals that underpinned your original investment still exist today and that you can achieve excellent growth in that market, or else you would be better off looking elsewhere.
Mistake 5: Timing The Market
Any successful investor will tell you the key to long-term performance is not timing that market but time in the market.
We often hear of investors waiting for the market to crash or for interest rate cuts before they buy.
They could be waiting a while. We haven’t seen a major crash for years despite many predictions from “industry experts”, and the expectation is that interest rates will not return to the ultra-low levels of the mid-2010s.
Our advice?
Get into the market when you can, at a rate you can comfortably afford, and hold for the medium to long term. You’ll ride out any dips and more than likely outperform the vast majority of your peers.
Summary
Mistakes will always happen. It’s a part of life to get things wrong. And, importantly, this is how we learn and grow.
It is tough and there are risks, but with a little knowledge, you can avoid making an error that could seriously impact your investments.
We wish you the best of luck with it. And remember, never be afraid to ask a question or lean on others – speak to your accountant and local estate agents, connect with other investors, and find a mortgage broker you can trust.
The knowledge and experience of others can help guide you along the way.
