When I say property investment to dentists, they usually come back with the usual remark “I trained to be a dentist not to clean toilets”. This is what I call total BS (Belief Systems). Cleaning toilets and property investment are not linked and even if they were, you would outsource the cleaning right? With interest rates at the bank being at an all time low property investment seems attractive. As a part time property investor and full time dentist, I will give you some tips on how to avoid the five most common pitfalls of property investment.
1) Set Goals
You have to be so careful and clear about why you are going into property investing. Property can be both a passive and active form of income let me give you an example of both – I buy a property get a letting agent to manage my property and rent it out. This would be a passive form of investment. On the flip side if I buy a rundown property do it up myself and then sell it this would be a very active form of investing as I am investing both time and money. As busy 9-5 dentist probably the least appetising thing to do after long day of work is to sit down and do some DIY so go down the passive income route. Your time is a lot more valuable working as a dentist than doing your own handyman work.
2) Gross yield v return on investment
When calculating whether a property is worthwhile to invest in do not use the gross yield. A gross yield is the rental income divided by the property price. It is a completely useless number that tells you absolutely nothing. Use return on investment instead which is the amount of money you get from the property minus all costs divided by the amount of money you put into the property x 100. If you want to work out how to calculate the ROI then click here. The amount of ROI you should be aiming for is 8-10%.
3)Use a mortgage
Mortgages on rental property is considered good debt providing the rental income is enough to cover the mortgage interest payments. Mortgages will increase the amount of ROI that you get on a property. Also inflation will erode away the value of the debt so when you do pay the mortgage back it will be significantly less value wise than when you took it out. Do not buy a property in full cash if you can help it.
4) Get Educated
You would not dream of doing a root canal treatment with no prior training so don’t buy a property if you have very little knowledge about it. There are many pitfalls within property investment that can be avoided b reading around the subject before charging in. Here are some books and resources that I recommend:
5) Invest for capital gains rather than rental income
Yes both are important to a degree. Do not go for a highly negative cash flow to speculate on the property price going up. Make sure every property investment that you do is putting money in your pocket. Equally though do not buy property in a bad area with high rental yields yes you may make money on the rent but the property will not increase in value. Buy in an area where there are good schools, low crime rate, good shopping facilities, good amenities and good job opportunities.
We have barely scratched the surface of property investing in this article. Property investing is an exciting topic that can produce good passive income to supplement or even completely replace your income as a dentist. It definitely is worth considering.