Common Investor Mistakes When Building a Portfolio
Building a property portfolio requires careful assessment of many factors related to aspects such as market conditions, financial requirements, the economic outlook, historical data and individual property analysis. Your personal goals, plans and risk tolerance should also be considered.
Sadly, many property investors are unaware of their tolerance to risk in terms of the type of returns they’re going to get. There are those who have a more conservative outlook when making investments than others. People that have high risk profiles may be prepared to develop a property or renovate, whilst those with a low- to moderate- risk profile, may only buy a property that needs no updating or may be prepared to make a property purchase after saving a significant portion of the property price, due to a fear of getting into debt.
Being uninformed about your risk profile makes you susceptible to making ill-informed decisions, such as buying the wrong property type. Not fully understanding the risks associated with a property, may lead to issues that arise during and after the purchase process which can have compounded effects in the future.
One particular situation where many additional risks need to be considered is when you’re buying off the plan. These include risk factors such as the quality of the builder or developer, whether the development timeframe will be met, zoning implications, market trends and so on. People are often not aware of the plethora of risks and variables associated with buying off the plan, simply because they are not necessarily brought to light at the point of purchase by the selling agent.
Clearly, it helps to understand your risk profile and the risk associated with the property or strategy, to be able to make better informed decisions.
Many investors are attracted by the idea of having as many properties as possible. They conclude that this will simply lead to a greater financial gain. However this is not necessarily the case. Not only can property values fluctuate, additional properties require increased maintenance and administration which impacts time and costs. In addition, the financial burden can minimise investment liquidity and limit your ability to fulfill other lifestyle ambitions. It’s not about how many properties you want, but how many you need to fulfill your objectives.
There’s much more to investing in property or real estate than just signing the contract. The entire process of understanding what classifies as a good investment-grade property versus investment stock, and how compatible that investment is to your risk profile requires strategic planning and coordination. Planning consists of considerable research and analysis to build a solid fact based foundation. This foundation helps facilitate the coordination of property selection and assists with the various decision making stages that arise, up until the point of purchase.
It’s surprising to see just how many people buy property, for the sake of buying, without a clear property investment plan. This gives them no foundation to move forward with to grow their portfolio, which is similar to building a house without appropriate foundations on which to build the rest of the structure.
It should go without saying that having a good understanding of what your investment is going to do for you, or what you need it to do for you will help in knowing where to start. A documented strategy that outlines your direction, whether its capital growth or cash flow, can serve as the foundation that you can implement and measure back to that strategy. At key points on your timeline, you can periodically check your target progress, see how far you have to go and what needs to be done to get there. Monitoring every step as you go is essential.
It’s imperative to never sign anything with your name unless you are confident you have a full understanding of all contract inclusions. From a cautionary point of view, you should have contracts reviewed by a lawyer in writing before you put your pen to paper, due to the array of complexity around a legally binding contract.
Also, make sure that you fully understand the details of the contract including the accounting and tax elements before you start. Consulting with professionals on this is critical before signing too.
When it comes to building a portfolio or making a property investment, it is essential to be fully equipped with well-researched and fact-checked information to ensure that you have a good understanding of the personal and property risks. This will help guarantee that all your decisions moving forward will give you the results that you deserve and are worthy of your hard-earned money.