Get a glimpse on pitfalls in property investment

Get a glimpse on pitfalls in property investmentImage Credit: Supplied

Purchasing property for investment is an attractive idea in a booming market. Everyone dreams of owning assets that offer excellent benefits, particularly good profits and strong capital gains. It can sound very simple for one to look for a bargain deal and rent out the property. In reality, a single mistake can turn a profitable asset into a financial burden for the rest of your life.

Property Weekly highlights eight common mistakes investors must avoid to make maximum gains on their investment.

1. Making a decision based on emotion

Several investors buy property based on personal feelings, which can be a big investment blunder. In such cases, the investor's logic of purchasing a unit is clouded by personal reasons, such as the unit being close to one's residence, work or regular holiday destination.

This diverts attention from making maximum returns and capital gain.

Buying property that can potentially grow in value should be the real goal of property investors. On the other hand, emotional factors are an ideal starting point for end users and homebuyers.

2. Inadequate research

Failure to perform proper due diligence can lead to bad decisions and difficult situations such as entering the market at the wrong time, selecting a unit in a bad location or buying property that requires significant repair.

''Not doing market research and not shopping around are among the worst mistakes I see on a regular basis,'' says Laura Adams, Managing Director of Carlton Real Estate. ''Several people invest because of promises of big and guaranteed returns, however, there is nothing on this market that is guaranteed.''

She adds it is essential to determine the worst-case scenario in the market and make sure you can afford void periods and cover service charges or mortgage payments while the property is empty.

''Also, do not expect to flip [or quickly resell the property for a profit], as this is nearly impossible because there are no distressed deals on the market and there are now a lot of educated buyers and investors who know what a deal is,'' says Adams. ''And do not overspend; make sure you are investing what you can afford.''

3. Moving without a plan

Investing in property requires a long-term strategy, but many investors treat real estate investment as a get-rich-quick scheme. Before committing to any property investment, as in any other business, investors should identify their goals and timeline and map out ways to get there.

That means being clear on whether you want to purchase a property, remodel and resell it or buy and let it out for a longer duration until it reaches your desired level of capital growth. Also, evaluate if you are in a position to overcome any financial shortfall or manage other contingencies.

Jodie Louise Smith, Director of JLS Properties, says being prepared is key to investing right.

''Before selecting a property, know your budget range and ensure your finances are pre-approved,'' says Smith. ''Also, make sure you choose your agent wisely — someone who can guide you in each step of the way, manage your growing portfolio and one you can trust. Being prepared means not wasting your valuable time.

''In addition, having an element of control and involvement in your investment is essential for a successful outcome.''

4. Excess leverage

Real estate leverage is an appealing tool for investors to increase returns. Many times investors are captivated by high price appreciation in the market and end up taking excess leverage to buy property, but this is a big risk.

''Excessive leverage is toxic. It helps make a quick profit in a booming market, but it is disastrous in a downturn market,'' says Sunil Saraf, Managing Director of Tanjay Real Estate.

He explains in such a cycle, an investor is left highly leveraged, while the investment valuation goes down, resulting in negative equity, i.e. taking out a loan that is more than the property's value.

This was what happened to several investors who purchased expensive property at peak prices during the boom period, but had to endure very low valuation during the market downturn and very high mortgage amounts, which were 30-40 per cent higher than the value of the property.

Saraf says controlled leverage is preferred. This means taking out a mortgage not more than 70 per cent of the property's worth, so even if prices decrease by up to 30 per cent, the investment will not have a negative equity.

5. Failing to read the contract's fine print

People are drawn into property investment because of the lucrative profits in a booming market. Lured by positive market sentiment, many buyers take property finance without properly understanding the mortgage terms and conditions, which can lead them into a debt trap.

''I have noticed investors often sign mortgage or financial documents in a hurry, even in parking lots, as some bank executives assure them that everything will be taken care of,'' says Saraf. ''People sign the mortgage without reading or understanding the bank's terms and conditions. There are hidden costs and implied penalties in these documents, which must be understood.''

Saraf advises investors to seek help from a qualified, professional mortgage broker. An incorrect financial structure will have a detrimental impact on investment gains, whereas acquiring the right type of financing can save you large sums in the long term.

6. Not considering the issues related to self managing the property

A do-it-yourself approach in managing property is a crucial decision for any investor. But before going the self-management route, ask yourself: Do I have sufficient time, resources and expertise to manage my property alone?

Many investors think self-managing their property will give them extra profits. In reality, as the portfolio increases, finding tenants, collecting rents, handling maintenance, etc., can become daunting and time consuming tasks.

''In most countries the landlord pays agents for leasing the property, but in Dubai the landlord does not pay the agency for such services, so it does not make sense self-managing the lease of the property as it can be very time consuming,'' says Adams.

Moreover, Adams says agents know the market better and have contacts with companies to get good tenants, while marketing the property also becomes easier.

However, if investors are not experienced in Dubai's property laws, which is still constantly changing, they can end up in trouble when including the wrong clauses in contracts.

''I have seen this many times, especially with rent increases and notices for tenants to vacate,'' says Adams. ''In addition, it can be difficult for investors to adhere to tenant demands regarding maintenance, especially if they are not in the country.

Therefore, investors without expert advice and support could lose out on opportunities to get the best rent, determining the ideal time to sell or knowing what's going on in the community they have invested in.''

7. Not paying attention to maintenance work

In an attempt to save on costs, many landlords do not bother to keep their property in good shape, neglecting regular maintenance and repair works. A well-maintained property will add value and help in marketing it at highly profitable rental or sales rates. But some investors fail to see the big picture when it comes to property maintenance.

''Neglecting maintenance will have a negative impact on your financials and on your property, especially in this region,'' says Suraj Rajshekar, General Manager of Rocky Real Estate. ''If maintenance is not attended to on time, the property will deteriorate faster. In addition, preventative maintenance is always better because it can become too expensive to fix damages later.''

Property insurance also plays a major role in securing higher returns.

Rajshekar says, ''When insuring property as a whole, landlords should be aware that the damages inside an apartment can be caused by tenant activity, wear and tear, poor construction quality or neighbours neglecting maintenance work in their own property.''

If these can be covered by the insurance, it would help the landlord protect the asset and prevent major maintenance expenses.

8. Fixing rents at unsuitable levels

The rental rate is instrumental in determining the annual yields of an investment. However, setting a rental rate that is not in tandem with market numbers can have a detrimental effect on your investment.

A rental rate that is too high runs the risk of the property remaining empty for longer periods, while rates that are too low can put the investor under financial pressure.

Rajiv Ghanekar, Associate Director of Fine and Country, explains that the right rental rate of a property is ''what the market is willing to pay'' and landlords can gain a fair understanding of this figure from the following:

• Reputed realtors who are specialists in a particular area.

• A concierge or reception team stationed in a project.

• Landlords who own similar units in the same project.

• Listings of similar units in property portals.

• Observing the number of cheques required by the landlord, as this can show some variance in rental values.

''Potential tenants usually prefer to be given one [appealing] price that is non-negotiable,'' says Ghanekar. ''Pricing your property can also speak a lot about the personality of the landlord and the future of your relationship.

Therefore, refrain from pricing it high unless there is a value addition to the property, such as an annual maintenance contract, distinguishing upgrades, etc. Share the facts with your realtor.''

A landlord can also settle for a rent a bit lower than the market if taking one cheque for an annual rent payment, if a slow season is approaching or if a landlord is in urgent need of funding, says Ghanekar.

Did you know - Confidence in Dubai's real estate industry is at an all-time high

Source: Hina Navin, Special to Property Weekly


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