Property investment is a very appealing business to get into. It can be highly profitable and it is often a reliable source of income for those who do it well.
Unfortunately, it is easy to go about it in the wrong way, so it makes sense to take advice from an expert. Vincent Wong, one of the most well-respected and well-recognized property investors in the UK, is keen to help. He reveals the most common mistakes people make in this business and explains how to avoid them:
Not Looking After Cashflow
“A lot of people pay too much for their property so the mortgage is too high,” Vincent explains. “Consequently, the rental income doesn’t cover the monthly mortgage payments and the shortfall has to be subsidised from the owner’s own cash or after-tax income.”
This issue occurs most frequently when buyers invest in newly-built developments because the developers know they can charge a premium and get away with it. “The mortgages are way too expensive and these properties are typically over-priced,” Vincent says. “Many of them don’t even rent out because there are too many units in the development so there’s too much rental competition.”
Some people underestimate the importance of getting a good price for a property because they believe that the capital appreciation of the property in the future will make up for the lack of cashflow to begin. “This is wrong because it’s very speculative,” Vincent says. “And what if prices actually don’t go up?”
“To avoid this, make sure you buy in the right location, research the rental demand and avoid new-build developments. Do a rental assessment and ensure the mortgage interest and repayment are covered by your rental income.”
Not Dealing With Motivated Sellers
“Many people go to estate agents looking for a good deal,” Vincent says. “But often they put in offers based on inflated asking prices. That’s what agents do to try and get as much money as possible for a property.”
“But if you deal directly with sellers and find the ones who are motivated to sell, they will give you a much bigger discount if you can persuade them that you can buy the property quicker than if they leave it on the market indefinitely with an agent.”
Situations which produce motivated sellers include divorce, inheriting a property that comes with inheritance tax, migration to another country or loss of employment.
“If you learn how to approach sellers directly, find out about their situations and give them the certainty of a transaction, this will enable you to obtain a much bigger discount,” Vincent explains. “So always deal with motivated sellers.”
“What makes a good deal is how much you pay for the property in relation to its value,” Vincent explains. “A lot of people offer too much and they end up with a bad deal. They make assumptions about their offer and worry that an offer that is too low will offend the seller or lead them to say no. But you don’t know whether that is the case. You don’t know anything about the circumstances. And you assume you have to outbid other people.”
To make matters worse, sometimes estate agents tell lies, such as ‘This property is in a sought-after area’ or ‘There’s a higher offer on the table than yours’.
“You have one chance to make your lowest offer and you can always negotiate from that to meet somewhere in the middle,” Vincent advises. “So never make assumptions that the owner will reject your offer outright.”
Not Playing The Numbers Game
“When you’re just looking at one or two property deals and mulling over them and trying to squeeze every last drop out of them, then you will probably pay too much,” Vincent says.
“Or you might take on a deal that is a complete dud and the numbers don’t stack up. And because you feel that you don’t have any other deals coming along, you tend to do it. If you buy one property and pay too much for it, it could take you out of the investment game pretty much immediately.”
“In my book Property Entrepreneur, I described the 100, 10, 5, 3, 1 approach. Look at 100 potential deals, shortlist ten, put offers in on five, up to three sellers might consider your offer, and then buy just one property. So if you want to buy one property per month, you ideally need to look at 100 potential deals every month.”
Being Too Ambitious Early On
“Many people, especially those new to property investing, have great ambitions and want to do big deals,” Vincent says. “Even though they haven’t got any experience and haven’t bought or managed a single property, they want to do a million or multi-million-pound deal straightaway. That’s way too ambitious.”
“There’s a saying that you need to think big but act small. Your first few deals should be really small just to get some experience and get any mistakes out of the way. If you want to do property deals, you need to focus on them and go through the learning curve.”
“Some people are very fickle. They jump from one thing to another. One minute they’re doing a buy-to-let and the next they’re doing HMOs. Then they go and trade forex and go partying for a while. These people are not focused enough. You need to keep your eye on the ball the whole time. Do your first deal, then your second and just keep going.”