The Top Investing Mistake to Avoid
When it comes to successful property investing, it’s worth remembering that what you don’t do matters just as much as what you actually do.
In my book Bulletproof Investing, I point out the biggest mistake to avoid is simple: don’t take unnecessary risk when it comes to cash flow.
The truth is, you can have the best capital growth strategy in the world, but if you can’t afford to hold the property, it is a moot point. That’s why I follow three key rules that help me sleep at night and outperform the average investor:
1. Stick to the middle
What this means is that I don’t chase premium properties. The reason for that is because the tenant pool is too small. Further, I don’t buy at the bottom because at that level the rental income is unreliable.
Here’s why:
- High-end properties may look attractive, but the higher the rent, the fewer the people who can afford it. What this means is longer vacancy periods, sometimes three to four weeks between tenants. A 4% yield quickly becomes 3.7% if your property sits empty for a month each year, let alone two.
- Low-end properties, on the other hand, tend to attract tenants with unstable incomes. Even if the rent is paid eventually, frequent arrears destroy your cash-flow reliability. Again, yield on paper means nothing if you don’t collect the rent.
The middle of the market, however, gives you:
1) A deeper pool of reliable tenants
2) Fewer vacancy issues
3) More stable income
2. Capital cities vs the regions
As many as 75% of all jobs in Australia are in the five major capital cities: Sydney, Melbourne, Brisbane, Perth and Adelaide (the Big Five).
The same five cities account for 80% of the country’s population growth.
While regional areas may have moments in the spotlight, they don’t offer the long-term economic and population fundamentals that cities do. And in property investing, those fundamentals matter (a lot).
So why take on the added risk, I hear you ask?
I agree; there are more than enough opportunities in the Big Five to build a high-performing portfolio without gambling on regional growth stories.
3. New over old
This one often surprises people.
Some investment professionals swear by older properties because they look like they offer higher yields. The truth is when you run the numbers, new almost always wins from a cash flow perspective.
I don’t buy old properties because the expenses are uncertain and volatile, and you can’t use depreciation to help with the cost of holding the property. I will happily trade in half a per cent of rent return to get a new property.
Some math to illustrate this point. Two properties, same price: $750,000:
Yes, the older property earns slightly more rent, but that’s where the advantage ends.
- It has no depreciation benefits, meaning a smaller tax refund.
- It often comes with higher maintenance, vacancy and insurance costs.
- Over time, these hidden costs eat away at your returns (and your sleep).
Plus, by choosing new properties not only do I reduce the risk, but I get better tenants, own more properties (two new for every old in this example) and ultimately hold the property for longer because I am less exposed to a change in circumstances.
These same investment professionals say older properties closer to the CBD will grow more. That you’d be better off buying the older property above because it’s closer to the city. But unless you can prove that to me with data, which in nearly 15 years of property investing no one has been able to, it’s a gamble I don’t need to take.
4. Don’t sell
Every time you sell property you are lumped with selling costs, capital gains taxes and then the cost of stamp duty and other costs associated with getting back in the market.
I don’t sell. I buy great, often boring properties with good cash flow and then plan to hold them for a very long time.
Because my properties don’t bleed cash, if something unforeseen happens, I’m not forced to offload a high-maintenance, negative cash flow asset just to stay afloat.
I won’t chase slightly higher yields in risky areas. I won’t buy something old and hope for the best. And I won’t stretch into premium suburbs that look good on Instagram or impress my friends.
