Investment education: the foundation of profitable property investment

Failure to make a profit is a stepping stone to success

A friend of mine worked in the city of London many years ago. He’s told me plenty of stories about his time as a stock trader, but I recall one in particular at regular intervals. It especially comes to mind when I hear of a beginner property investor who has lost money on their first investment.

Investment education through experience

A mentor told Dickie that he could never consider himself to be a real trader until he’d lost at least £10,000 on a single trade. Of course, he didn’t believe this, and for months traded profitably every day. Then it happened. He made a trade and within minutes found himself sitting on a £27,000 loss. It remained his largest ever loss in more than 20 years of trading.

A few months after that disastrous trade, he was presented with a similar investment opportunity. He approached this one differently. He’d taken on board the investment education the previous loss-making trade had given him, and executed differently. It turned out to be his best trade and one that earned his firm more than £450,000 in less than 45 minutes (and him a £100,000 special bonus).

Whenever he recounts the story to me, he always tells me how if it hadn’t have been for that first big loss he’d made, he’d never have made that record profit. Investment education is a wonderful thing, especially when real life experience accompanies it. And that knowledge helped him to record a trading profit everyday bar three in his trading career.

In this article, I’ll look at a story of first-time failure in property investment, the common mistakes that beginner investors make, and how you can avoid those mistakes and improve your investment returns every time you invest in property.

A first-time buy-to-let nightmare

Property investment had always appealed to Trevor, and with a sizeable slice of equity in his home, he was ready to take the plunge. Trevor saw the house just a few streets away from where he lived and immediately fell in love with it. He’d lived in the area for nearly thirty years and was certain the property would rent easily. He put in an offer just below the asking price, and within a few weeks became the new owner.

Three years later he finally managed to sell it. He’d lost £25,000 on the price he paid, as well as having been in negative cash flow for most of the period he owned it.

He’d first held out for rent that he thought a tenant would pay, instead of checking out the market before he bought. He’d already lost thousands of potential rental income by the time he dropped the price to a realistic level.

Then the freezer needed changing. A couple of months later, the central heating packed up. Six months after that, his tenant suddenly left, still owing four months’ rent.

At the end of the whole sorry episode, Trevor had been put off investing in property for life.

Why Trevor wasn’t so clever

Property investment wasn’t the problem for Trevor. He made some classic and common mistakes along the way. Beginner errors that I’ve seen plenty of property investors make on their first foray into buy-to-let investment. He’d invested alone, taken no advice, and hadn’t done his research and due diligence.

Seven property investment mistakes and how to avoid them

In truth, Trevor’s investment suffered for some reasons, all of which could have been avoided. These are the seven common mistakes he made, and how you can avoid them:

1.     He bought with his heart and not his head

Trevor bought a property that was close to his home, a place he loved to live. He didn’t think about the fact that he lived in a small town with no railway station and several miles from the nearest motorway link. The largest employer had recently relocated out of the area. The local school was more than three miles away.

Avoid the same situation by removing those rose-tinted glasses. Consider what is important to prospective tenants, and measure your potential property investment against a set of criteria. Our 89-point due diligence checklist makes sure that investment potential is fully checked before you dive in at the deep end.

On top of this, when we research a property development, we undertake our deliberations based upon a 108-data point research process that ensures we understand the investment potential way before we make an offer.

2.     Trevor invested too much

When he bought the property, not only did he discover some months later that in his haste to secure the purchase he had overpaid, but he had also stretched his finances. He didn’t have a large enough contingency in place to pay for unexpected emergencies and repairs, and his outside earnings weren’t enough to sustain his investment.

Always work out your finances and leave some room for manoeuvre. An unexpected interest rate rise, emergency repair, or change in regulations could have a devastating effect on your finances if you’re not prepared for it. Working out a conservative cash flow projection will make sure that you’re never in the position of becoming a forced seller like Trevor eventually became.

3.     Trevor went in alone

The first time you walked you had a hand to hold. You didn’t just get in a car and start driving. On a new job, you wouldn’t expect to be left to get on with things on your first day. That’s what most of us do when we invest in our first property. Trevor certainly did. He saw what he thought was an opportunity, and stepped straight into a pile of doggy doo-doo.

Always take advice. Get a second opinion from someone who knows about property investment. Then make sure you benefit from as many professionals as possible. You’ll need to use accountants, solicitors, mortgage brokers, and I’d advise hiring a property management company to take away the day-to-day strain of being a landlord. You’ll also need the support of friends and family to encourage you if things get a little tough.

4.     Trevor didn’t think about the extras

Trevor did a back-of-an-envelope investment budget. He forgot about fees and charges on the way. He didn’t factor in any insurance (and so didn’t have any) and figured that any small maintenance jobs would be easy for him to slot into his already busy life.

When you invest in property, make sure you do so in an organised fashion. Keep track of everything – work to checklists as a way to make certain that you’ve dotted all the i’s and crossed all the t’s. Staying on top of the process of property investment is not easy. There are a lot of relationships to manage; that’s why many successful investors use a progression team to handle the purchase of property. And after the property has been bought, professional property management could take care of the unfamiliar functions of land lording.

5.     Trevor had watched too much television

I’m an avid watcher of property investment programmes, but I see something different to most. It’s all made to look so easy on the television: buy a property at auction at a knock-down, bargain basement price. Give it a lick of paint, perhaps replace a few cupboard doors, and lay a cheap carpet to spruce the place up. Then advertise in the local press and get a great tenant who pays top dollar rent. Trevor thought real life was like this!

I’ve always found that starting with your objectives is the way to go. Know what you want from your investment property, whether it is capital growth, rental income, or both. Once you have this in mind, then you can start to drill down to location and property type. Buying a run-down property might look like a good strategy, but if you’re not a repairs expert or you don’t have the time to commit, then you have to budget for this. Do you want to be a hands-on landlord or an investor who benefits from passive income while you sit on the beach?

6.     Trevor didn’t have an exit strategy

Trevor didn’t have an exit strategy. If things started to go wrong, he didn’t have a plan B.

If a property is underperforming, it’s usually best to cut your losses and run. Move onto the next. When you invest in property as a buy-to-let, selling in an emergency will probably be the last thing on your mind. I never invest without an exit strategy. In fact, it’s almost the first thing I plan – even if I plan never to have to use it.

7.     Trevor hadn’t become investment educated

Trevor had watched plenty of television programmes about property investment and spoken to plenty of his friends over a pint or two. But he’d never actually sat down and spoken to any single investor who had made a go off property investment. He may not have been going in blind, but he was indeed wearing an eyepatch and blinkers. And he’d turned off all the lights, too.

Investment education is the number one factor that will stop you from making all of the above mistakes made by so many first-time property investors:

  • Learn to research investment opportunities diligently
  • Make sure you know how to carry out a comprehensive cash flow projection
  • Discover all the people with whom you’ll need to foster working relationships
  • Understand yields, income, taxes, deductibles, and so on

I’ve been investing in property and helping others to property success for around twenty years. As far as investment education is concerned, I believe in two things:

  • Investment education should be free
  • You never stop learning

So, if like Trevor you’ve made a loss on that first property investment, accept it, learn from it, and move on. Just like my mate Dickie, next time you’re offered a similar property investment opportunity, you’ll be better placed to work out a deal that puts you on the winning side.

To find out more about our investment education and how it could help you to invest profitably every time, give my team a call on +44 207 923 6100

Best regards,

Neelam Springer

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