Creative Finance Newsletter FEBRUARY 2010

Investment Mistakes Are Expensive

Everybody makes mistakes, even property investors. And they can be expensive.

Here we explore the five biggest mistakes property investors make – and more importantly, how to avoid them.

Here is a list of five common mistakes that property investors can make - that can easily be avoided.

1. Not being objective

If you inspect a property and care what the curtains look like, whether the kitchen has stainless steel appliances and what the colour scheme is, you’re probably making this mistake.

Many investors forget that purchasing an investment property is for someone else to live in – a tenant. They review the property with their own expectations in mind.

Investors would be better advised to speak to property managers about what features are desirable for tenants in a given area, rather than thinking about what’s desirable for them. For example, in a family-oriented area then a well-fenced backyard would be important.

2. Not seeking expert advice

Investors who sign on the dotted line without consulting their accountants, solicitors or finance brokers are risking the success of their investment.

Many people don’t use these experts so as to avoid the cost. But there is a much greater cost to not using them. How many of us can be experts in tax, financial planning, or give ourselves some objective advice?

It is worth checking whether the experts invest in property themselves, to ensure that their advice is backed up by hard, practical experience.

3. Not having a “risk mitigation” strategy

Many investors fail to ask themselves some basic questions that would help them to reduce their risks.

For example what happens if:

  • The property can’t be tenanted for a period of time
  • The property burns down or is damaged by flood or storm
  • Interest rates go up by another one per cent or more
  • Circumstances change, for example they lose their job.

Investors need to have a back-up plan for when things go wrong. For example they should consider:

  • insurance not only for building and contents, but also landlord insurance to protect against rental loss or damage. Further, perhaps income protection insurance would provide added peace of mind in case of job-loss.
  • the type of home loan that they use to purchase the property. Would a fixed rate be better, or perhaps a flexible line of credit.
  • having access to extra funds, either their own savings or an easily accessed loan.

4. Not doing the research

Doing enough research prior to making the purchase will help the investor work out whether the property is a good buy or not.

The selling agent, whilst useful, should not be the only source of information. After all, they are working for the seller.

Nothing beats doing your own research:

  • How far away are facilities such as schools, shops, transport and medical facilities?
  • What is the history of capital growth in the area?
  • What is the demand for rental properties like? Are there many vacant properties for lease – why?

5. Not crunching the numbers

Most investors rely on rough estimates rather than sitting down and doing the hard numbers related to their purchases.

Particularly when looking at negatively gearing a property, investors need to know how much they will need to spend each month and work out whether thay can afford it.

For those investors who can’t do the calculations on paper, investors should consider the purchase of inexpensive property analysis software that helps do the sums.

10 Ways to Avoid a Credit Crunch

A credit card is one of the most expensive ways to borrow money.

However, you can make them work for you by following the ten golden rules of credit card management.

If you don’t use your credit card wisely, it will be one of the most expensive ways to borrow money. Some charge more than 20% annual interest.

And it’s not just the interest you’re hit up for: the big banks’ fee income from credit cards increased 170% in 5 years.

However, you can make credit cards work for you by using the 10 golden rules.

1. Pay your bill on time and in full

It’s the only way to avoid hefty interest. If you repay just the monthly minimum, it will take years (or possibly even a lifetime) to pay off.

One way to make sure you repay your bill in full is to activate your bank’s automatic sweep facility, or pay by direct debit.

2. Pick the best card for your spending pattern

Card users fall into three categories:

  • ‘always payers’ spend within their means and clear their bill on time each month.

  • ‘occasional late payers’ don’t pay on time or in full.

  • ‘never payers’ are known in the industry as ‘revolvers’, because they carry card debt from month to month without ever repaying it.

Decide which category you fall into: it will influence the best card for you.

3. Keep track of your card use

We tend to spend more money when using plastic instead of cash. Keeping an eye on spending can stop it getting out of control. Register for internet banking for easy monitoring.

If you find you’re spending more than you can afford, leave the card at home or take a pair of scissors to it.

4. Only spend what you can afford to repay this month

Cards should make life easier, but not cause you to rack up debts at high interest.

Use your card for what you’re certain to repay each month. If this is proving difficult to do, try a ‘no-credit-card month’ to get back on track.

5. Don’t own too many cards

There’s nothing wrong with having a couple of cards if you are disciplined. You might have one for regular use and another for occasional overseas purchases - for example, a card without a foreign exchange fee.

But if you lack discipline, several cards can be hard to control. You may also have to pay multiple annual fees.

6. Avoid cash advances

One of the worst ways to waste money is to use your card for cash withdrawals. Interest is payable from the day you withdraw the cash. Plus, the interest rate is often higher than the rate for purchases, and you’ll be slugged with a fee of about $1.50 for each withdrawal (even more when you are overseas).

7. Reduce your credit limit

Many people are lulled into a false sense of security by high limits and then rack up too much debt.

A high limit can also affect your credit rating if you apply for a mortgage or car loan.

So if it is over the top, ask your credit card company to reduce it. Be aware, though, that card companies usually allow you to exceed your credit limit - then they charge you hefty fees for the privilege.

8. Don’t get penalised

Penalty fees have proven a bonanza for card providers. You’ll be penalised $30 or more each time you pay your bill late or exceed your limit.

However, if you do get slugged with a penalty fee, you may be able to have it reversed. CHOICE and the Consumer Action Law Centre believe such penalty fees are excessive or even unlawful, and many credit card customers have had them refunded.

9. Understand how your card works

Card providers use a bewildering range of methods to extract fees and interest from their customers. Most of these costs can be avoided if you know how your card works. Take a few minutes to read the Terms and Conditions.

10. Reward yourself

Rewards schemes can enable those who spend at least $2,000 on their card each month to rack up enough points to enjoy free flights, shopping vouchers and other benefits.

However, cards with rewards can have high annual fees- such as $85 for a standard rewards-based card or $140 for a gold rewards-based card, compared with $29 or even no fee for a card without rewards.

To get any benefit from rewards cards, you need to spend quite a bit and always repay your monthly bill in full and on time to avoid interest. If you’re an occasional late payer, choose a low-interest card. Chasing rewards while paying interest is false economy.

This is an extract from Recession-Proof Your Finances, by Alan Dooley.
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