The 5 Biggest U.S. Property Investing Mistakes You Can Easily Avoid
It’s no secret that the price of Australian property has skyrocketed in recent times.
In the span of 35 years (1980 to 2015), the house price to income ratio in Australia has increased by 78%. We feel this price bubble every time we’re due payment. A large portion of our income goes to either rent or mortgage, and it takes years (if not decades) until residents can fully settle down without having to worry about paying off apartment and housing costs.
Because of this, investors have been struggling to enter the Australian property market. They pay too much without the assurance that they’ll get a return on investment (ROI), let alone get the value that they want.
Hence, many Australian property investors have been looking to invest overseas, where prices are much cheaper.
In the US, for instance, you can buy an entire house for the amount you spend on a single deposit here in Australia. This opens up plenty of opportunities for Australian investors, considering how much you can save.
But while investing at a cheaper price means that there is lower risk of a huge loss, it doesn’t make it risk free. Knowing that you’re paying less doesn’t guarantee your success.
Every investment entails some risk. No investor is 100% sure of the returns they will get. A lot of people still end up speculating instead of investing, depending almost completely on external factors like market prices and other aspects out of their control.
That’s why even if planning to invest in the US is, in theory, a smart decision, there are still many things that can go wrong if you don’t take the right investment measures.
Here are the top five reasons why people fail when investing in the US:
1. People invest without a strategy.
You don’t just pick the property with the lowest price and expect to receive soaring ROIs. We get it — it’s the easy way. But it isn’t the way investing works. Investing in property requires a lot of planning.
Every plan starts with goal-setting. Before you achieve success, you first have to define what constitutes that success. What is your target profit? When will you reach that target? How many properties should you have invested in over the next five years? How about 10?
With concrete goals, you’ll be able to map out the steps you need to take in order to reach them. A proper plan will allow you to find the most attractive property out there, at the right time and in the perfect location.
Planning for the right property to invest in requires a lot of research. Study how the US mortgage industry works. Learn about the locations with the highest property demand. Educate yourself on the pros and cons of investing in different types of properties in different areas.
Without a solid strategy, you’ll end up making questionable choices, trusting your impulses and luck rather than hard facts and data.
2. People buy properties that are too expensive.
One of the bad habits that some investors have is their tendency to overextend their budget.
Impulse buying on the “new and shiny” happens to property investors too. First-time investors, especially, can be too excited about investing in their first property.
Turnkey property companies, being expert sellers in the industry, entice potential investors on what seem to be great deals, but can possibly be terrible properties to invest in.
For instance, some will persuade potential investors by using the house’s big backyard or amazing pool as their selling point, when the location of the property is ages away from anything.
Those who can’t control their excitement end up believing in the sales talk and quickly buy these overpriced properties. They let their impulse override their rationality.
Be patient when investing.
Take as much time as it is necessary to find the right property to invest in. It’s impossible to know every nook and cranny of all the properties available to you, but the more time you give in doing your research, exploring your options, and filling up those cost-benefit lists, the more sound your judgment will be by the time you finally decide on which property to invest in.
3. People spend too much on renovations.
One thing that people seem to miss is the fact that more expensive renovations don’t guarantee better ROIs.
Sure, the quartz countertop upgrades and the laminate floor installations will look great and attractive to potential renters, but many of them avoid living beyond their means (and you do not want to be the one who tries to convince them to).
Many investors believe that renovations increase the value of the property more than the cost of making these changes. That’s not always the case, especially when you end up spending way too much.
Saving money is important to renters, so why would they pay a few hundred dollars extra to rent a house with nice amenities when there’s a similar one just down the street?
Decking your investment house out with gadgets and furnishing that look great on Instagram won’t result in a return of $200,000 if your prospects find a relatively simpler but much cheaper house nearby.
Renovations are good— necessary, even. But overdoing it won’t help you get high returns.
4. People don’t have the right team on the ground to help.
When you are looking to invest in your neighbourhood or in a nearby town or suburb, doing walk-throughs, inspections, renovations, and agent queries isn’t much of a problem. You live nearby; you can do it yourself.
But if we’re talking about investing on the other side of the world, that’s a completely different story. Even if you were wealthy enough to afford a regular trip to the US yourself for the sole purpose of monitoring your properties, it’s just not practical to do so. How much time will that eat up? How many travel documents do you have to worry about? You could do so much more with that potential travel money (e.g. save that up for another investment).
Too many investors spend ages identifying locations and properties to invest in, but seldom do they spend the same amount of time doing their due diligence on who manages their investment for them.
This often results in a pile of problems. And with the property being thousands of kilometres away, solving these issues on your own and maintaining your property and attracting potential tenants will not be easy.
In the US, you’ll need realtors, home inspectors, general contractors, insurance agents, property managers, US tax agents and more.
That’s why building a team on the ground is crucial when you want to invest in the US. Choose a team that you can trust and rely on for all the responsibilities of handling your property.
5. People have the wrong mindset.
Many people go into investing with a short term mindset, expecting the returns to come almost instantly. But the thing about investment is that it’s a long term strategy, not instant gratification.
Those who think short term end up going for high-risk gambles. Doing so might work the first time, but as it depends mostly on luck, this “strategy” won’t keep working every time.
You need more hits than misses, and you can only do that by changing your mindset on what your investment should be.
Results won’t happen overnight, but with a long term plan, you can invest in up to 10 properties within three to five years.
Having that kind of portfolio that generates passive income seems surreal, but it’s actually very possible with the right mindset, planning, and execution.
Katie, one of our clients, had this mindset and determination to learn how to invest smartly overseas. By following a long-term strategy, she was able to get two investment properties in the span of only nine months.
How to avoid making US property investment mistakes
Now that you know the biggest and most common mistakes people make when they invest in US property, the next step is to avoid these mistakes.
We’ve already provided solutions for you in previous blogs but to recap, it’s a five-step process called STARR. It’s an acronym for the five easy-to-memorise steps that you need to take in order to intelligently invest in the US.
Strategy – Set your goals, from the broadest to the most specific ones, and build an elaborate strategy that leads to achieving them.
Team – Build a team on the ground that you can rely on for all the walkthroughs and inspections.
Acquisition – Find the right property in the right location to invest in. Follow the three R’s: research, review, and redo.
Renovation – It’s important to renovate the property you’ve invested in to keep it neat and attractive to renters or buyers. Just remember not to spend too much on it.
Realisation – By investing in the US and following the steps above, you can easily bring in consistent returns of at least 10% to 12% after costs.
Investing in the US is a great idea, considering how significantly cheaper it is compared to the prices here in Australia.
But of course, deciding to invest in the US involves a lot of responsibilities in order to be a success. The aforementioned mistakes can lead to a disaster investment at worst, or give moderate returns at best (or even greater if you’re lucky — but you don’t want to depend on luck).
Avoid these mistakes and work towards consistent and high ROIs by following the STARR process.