3 common mistakes new investors make

According to him: “In those days, you used to need to have … probably a 25 per cent deposit. And you used to have to sit in front of the bank manager. There was just no way in the world that I was ever going to ... save up to buy a property [on my small income].”

Eventually, he started earning more money after he took on a sales job. It was also through this stint that he came across his first investment.

One of his clients was a developer who insisted on having editorials as advertisements, so he read about negative gearing, the power of leveraging, stamp duty concessions in Melbourne, and all other things regarding property. Soon, he found himself asking about the apartments being built by his client.

Mr Whitlock shared: “It reached a point where I'd go into their office and they'd always have the model there in the middle. This wonderful, white, towering model of new apartments with little people playing tennis [on] a little artificial tennis court—they looked wonderful."

“One day—it's a classic slip—I went, ‘How much does one of these two-bedroom apartments cost?’ And then, that was the end of it for me … I am the easiest person to sell. I'm a salesman's dream,” he added.

He describes the moment as a “very strange experience” because he was overcome by both fright and excitement, so much so that his “heart just started beating a little bit faster and [he] started breathing a little bit heavier”.

Unfortunately for Mr Whitlock, the investment turned out to be one of the worst decisions he has made in his life.

At the time of purchase, back in 1997, the asset he secured was part of the new builds in the Southbank in Melbourne, a rapidly developing area with an “inner city” lifestyle. The property was nowhere near completion, so he had to wait for 18 to 24 months to enjoy the tangible asset.

According to him: “The South Bank was being redeveloped, so it was … certainly nowhere near completion—these were off-the-plan purchases … You've [only] got a fancy brochure, you've got this wonderful model, and you've got some very good salespeople.”

“Worst decision because … [in] my personal opinion,” the investor highlighted.

Here are some of the most striking mistakes Mr Whitlock made as a new investor more than 20 years ago:

Failing to review costs associated

While off-the-plan purchases aren’t necessarily bad investments, Mr Whitlock regretted not knowing the costs associated with a new serviced apartment. He understood the concept of capital growth, but he didn’t get educated about the possible impact of cash flow on his growing portfolio.

According to him: “I thought, ‘Great! You buy a place for $217,000—a two-bed in this … luxury apartment. What I didn't understand [in] those days was cash flow from an investment. I understood the concept of capital growth, [where] you buy it ... and you hope it … doubles in value every 8 to 12 years.”

“I got excited about it … [My fiancee and I worked] hard, saved 10 per cent of the purchase price … [and] scraped our earnings together for that month so I could put the 10 per cent down. Now, that meant I've got to save for another 18 months, another 10 per cent,” he added.

As a budding investor, Mr Whitlock also did not have enough knowledge on how body corporates work, the agent fees associated with this type of transactions, as well as the impact of rising interest rates.

Making emotional decisions

For the next 18 months, he thought about nothing else but the property they were saving for.

It was a “coming of age” for him—an actualisation of his long-term dream that definitely intensified his focus and his sense of commitment and responsibility.

Mr Whitlock said: “It committed me to working hard. It took me through the peaks and troughs of being a salesman, which are significant. It gave me focus through the dark days. And it gave me focus in terms of saving money. And that was a good thing for me.”

Looking back, these emotions made him buy his first property for all the wrong reasons. Instead of deciding based on the basic fundamentals of a good investment property, he was sold on the idea that this is a place he personally wanted to live in.

“It was emotional. Totally emotional … I made my decisions as ... ‘Wouldn't you love to live there? See the views?’ It was really, really bad,” he said.

Having outdated market knowledge

After his property was put up on the market, it eventually doubled in value in less than 10 years. Mr Whitlock did get good money out of it, but its overall cash flow was really poor and holding the asset became more challenging as interest rates went up.

Despite the less-than-stellar returns, he ended up buying four more off-the-plan apartments in the same city—all because he wasn’t in touch with the Melbourne market. All in all, he bought two two-bedroom apartments and two one-bedroom apartments in the city, hoping that they also go up in value over time, just like his first property.

According to Mr Whitlock: “I reckon the two better be at least ... well over half a million … and the one-bedder would be up in the $400,000s … certainly high threes.”

“I made good money on the first one because I held it for a long time. I made a bit of money on the one-bedder. I lost probably $20,000 on another one I sold and I just about broke even on another.

“The whole thing was pretty disastrous … My investment decisions were appalling,” he highlighted.

Lessons learned

Looking back, 20 years later, one of the most important things that Mr Whitlock wanted to change about his investment journey is his understanding of cash flow. According to him, chasing capital growth is not worth the stress of having to scrape your earnings every month just to hold your property.

He said: “It's not hard to … work out what your property may be worth, [but] what I would say is, understand the value of cash flow. It's critical because when you're chasing capital growth [while] you're hemorrhaging on a monthly basis, that's a bad thing.”

In line with this, you also have to keep track of your losses to make sure that you’re getting more than what’s going out of your pocket.

“Is it worth losing $12,000 a year to hope to make a capital gain in the future … ? [Ultimately], cash flow is king,” Mr Whitlock added.

Aside from cash flow, he also wishes he had paid more attention to interest rates and their impact on his portfolio. 

Nowadays, the rates are unprecedentedly low, but he strongly discouraged falling into a false sense of security that this will be the norm. After all, all markets go through cycles, and most changes come up without further notice.

The investor explained: “It's just a market cycle, and things have a habit of changing when you don't expect it to … Interest rates will go up [or down] without a lot of notice.”

Combining your knowledge of cash flow and interest rates is vital to sustaining your portfolio, according to him.

Mr Whitlock said: “Be really conscious of your cash flow … [so even if] interest rates [are] rising … [or] a property doesn't have a strong yield ... you [won’t] put pressure on yourself.”

“You got to look to make a better future for yourself, but there's also the matter of living now and going through pain and strife, and getting lost in debt is not a positive way to go through life,” the investor concluded.

Tune in to Alex Whitlock and Michael Johnson's episode on The Smart Property Investment Show to know more about how to build and sustain a portfolio for the long-term.