The danger of not doing your property buying research properly

Every month, real estate magazines promote different hotspots and investment opportunities around Australia, and first-time investors can be tempted to jump on the bandwagon and blindly follow that advice.

Instead, I encourage you to do your own “hotspotting”. It’s all about finding the ideal investment property that suits you, your lifestyle and your investment goals.

DIY hotspotting is a time-consuming process, because there is so much research involved. Once you select the area you want to invest in, it’s important that you do your homework by checking out past and present capital growth rates, and investigating the level of infrastructure and amenities in the area, including roads, public transport, hospitals and schools.

All of this takes a commitment of time and energy, but this is definitely not an area in which you should cut corners. Trust me, I know, I learned the hard way.

Not doing your homework is one of the grand faux pas that investors — particularly first-time investors — make. And it can end up costing you a bundle.

There was a property we bought many years ago in Kalgoorlie in Western Australia. It was our eighth property purchase and at the time I thought, “I’m an experienced property investor, I know what I’m doing!”

And I took shortcuts.

I lived in Melbourne and the property we were looking at was on the other side of the country. We had done some research and identified Kalgoorlie as our next place to invest because we wanted to add a cashflow-positive property to our portfolio. In Kalgoorlie property prices were low and rental yields were high and there seemed to be plenty of opportunities to invest.

We were looking at a small house with an asking price in the high $100s, with a fantastic rental return of $330 per week, which suited us perfectly.

The lease was a little bit different in that it wasn’t a private rental, it was actually leased by the government. The government department was called GEHA (Government Employee Housing Association), and it was its sole focus to source and rent appropriate properties for their staff.

The brilliant thing about GEHA is that it likes stability, so leases tend to be long term — a minimum of three to five years with automatic CPI (Consumer Price Index) rent increases and options for lease renewal built into the lease contract. From an investor’s perspective, it sounded ideal.

At $330 per week the rental return was more than enough to cover the mortgage and ownership costs and the GEHA lease had another full year to go on its five-year term. At that point the department had the option to renew the lease for a further three years or terminate it.

The real estate agency that I was dealing with at the time was exclusively a sales agency and didn’t have a property management arm. I asked the agent what he thought the property would rent for in an open market, just in case GEHA didn’t renew the lease.

“Helen, you’ll get $330 per week easily on the rental market,” he assured me. It was exactly what I wanted to hear, so we put in an offer of $173,000 and 30 days later we settled on the house and celebrated the arrival of our first cash flow positive property.

What was my big mistake? I didn’t do enough homework. I just took the selling agent’s word for the rent on the open market. I didn’t try to validate the information he gave me, or get the opinion of property management agents in the area. I didn’t do any more research on GEHA to see whether it regularly renewed its leases. Nor did I check whether the property we were buying was even the type of property they still wanted for their employees.

You can guess what happened next.

Twelve months later, at the expiry of the lease, GEHA decided not to exercise its right to extend the lease.

At the time I thought, “OK, no problem. I’ll still get my $330 a week from another tenant” — in fact I was even thinking that I might be able to increase the rent a little! This was too easy.

I asked a property manager to look through the house and after doing so, she called me back right away. “Helen, you’ll be really excited,” she said. “The market’s really buoyant right now, there’s lots of demand for rental property, particularly this style of house.”

“I can easily get you $260 a week,” she said.

My jaw dropped.

Several seconds of silence passed before I regained my voice.

“You mean $360 per week, right?”

“No, no, $260 per week,” she confirmed.

I couldn’t believe it — I was truly gutted.

At a rental return of $260 per week the investment was slightly negatively geared — and the whole reason why we went to regional Western Australia was for the opportunity to secure a positive cashflow deal!

We had bought it because it was earning $330, which was great cashflow. In one phone call, our investment had gone from being our shining star to a bit of a lemon.

We offloaded the property at the first opportunity and we were even able to make a little money out of the re-sale. But as a result of that experience, I now always do detailed due diligence research when I’m in the market to buy. I generally end up with a 40-page document on each property, and that’s because I certainly don’t want that sort of thing happening again.

This is now your opportunity to learn from my mistakes. Don’t take shortcuts when it comes to your research. Yes, it takes time and effort to make the right decisions but if you put in the hard yards now, you’ll be rewarded with a robust investment property portfolio that will deliver great returns for years to come.

Helen Collier-Kogtevs is an educator and property investor. This is an excerpt from How to Start Creating Real Wealth Through Real Estate, published by Major Street.