Top traps for first-time property investors

THERE are plenty of pitfalls the first-time real estate investor needs to avoid, writes Anthony Keane. Here's a list of the most common errors and how to avoid them.

Getting your foot in the door of property investment can be a scary proposition.

It's not every day you sign up for hundreds of thousands of dollars of debt for something you are not living in.

History has shown that, for long-term investors, the rewards are usually worth the risks, but there are plenty of traps the first-timers need to avoid.

Tax, interest rates, tenants, property agents, renovations and insurance are among the key areas where mistakes can cost investors big money, or at least deny them some of the profits they seek.

Today, Your Money examines some of the traps for first-time property investors.

Seminars that bite

University lecturer, author and investor Peter Koulizos warns about so-called "property education" seminars that are really just sales seminars designed to flog overpriced property to pumped-up investors.

But I would encourage people to try to see lots of seminars just leave your chequebook at home," he says.

"You get different perspectives and you can get good information, but just go with your eyes wide open."

Where's the research?

"Some people spend more time researching the plasma TV they are going to buy, rather than the property they are going to buy," says Koulizos, who wrote The Property Professor's Top Australian Suburbs.

These days we are spoilt for choice, with a wealth of information about property prices, trends, hot and cold suburbs, tips, traps and warnings in the print media and online.

Buying for tax purposes

Koulizos says many people look at property investing as a way to get a bigger tax refund.

"But you are only getting a refund because you made a loss," he says.

This practice is known as negative gearing, but seasoned investors know that a positively-geared investment where the property pays you a profit is the ultimate aim.

First-time investors are usually negatively geared in their approach, so they may as well get their tax refund back sooner.

Louise Carr, a property strategist with investment group Ironfish, says completing an income tax variation form can help smooth out your cashflow rather than get a lump sum refund.

"This way you can organise to get your tax back on a weekly or fortnightly basis with your pay," she says.

Depreciation debacles

One of the best tax benefits from property investment is being able to claim a deduction for depreciation of items within the property and the building cost of the property.

You don't physically pay these costs, so effectively it's free money coming back through your tax return.

However, many investors don't understand depreciation, Carr says.

"Deductions for new homes can be up to $15,000 a year.

"We often find that some accountants don't make people aware of it. We recommend going to an accountant who owns property themselves, so they know the advantages and are aware of tax legislation."

A depreciation schedule will list all your depreciation deductions. They typically cost $500-$600 and are available through a quantity surveyor, are tax-deductible themselves, and are available through a quantity surveyor.

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