The #1 Mistake New Investors Make: Building a Dream Home Instead of an Asset

28/10/2024
Building a Dream Home Instead of an Asset "

Don’t be fooled: a mansion on the beach will almost always get you a lower ROI than a practical home in a sensible location.

Imagine you’re building your first investment property. Excited by the high-end features and finishes you’d love in your home — the elegant hardwood floors, the spa-like bathrooms, that gorgeous sprawling deck facing the beach — you spend big.

Because more luxury means more returns, right?

Flashing forward a couple of years, you learn the hard way that this isn’t the case.

It’s far more difficult to find high-paying tenants than you thought it’d be, and your property is mostly empty. It could take a lifetime just to earn back what you spent on this extravagant investment.

More Australian property investors fall into this trap than you might imagine, failing to separate their personal preferences from financially sound decision-making.

Here, we’ll discuss why so many investors make this mistake, and how you can avoid it.

The Dangerous Allure of Luxury: The Beach House That Didn’t Pay Off

To illustrate why people get lured into unnecessary luxuries that kill their ROI, let’s consider Jane and Tim’s investment journey.

When this Aussie couple snapped up a secluded plot of land right on the beach, they believed they had struck gold.

They let their imaginations run wild, envisioning a luxury mansion that would attract high-paying tenants like moths to a flame. From the sheer size of the house down to the finishes and furniture — imported Italian tiles, custom-built cabinetry, a heated pool — they would spare no expense in bringing their dream home to life.

The build took years, and the expenses kept piling up. But Jane and Tim were adamant their ROI would far outweigh any financial hardships they were currently facing.

When the time finally came to list the property on the market, they popped the champagne. Any day now, they’d get a call that would make all of this worth it.

Only, that call didn’t come.

And with each month that passed, spending more and more on marketing and staging, their joy turned to despair.

Sure, they had brought their dream home to life — but was that really what the market was looking for?

Unfortunately, it wasn’t.

Eventually, Jane and Tim did get some tenants, but their beautiful beach house was often vacant during the off-season, and seasonal rental flurries were not enough to offset the high costs of maintenance and mortgage payments.

So where did they go wrong?

Avoiding Common Mistakes: 3 Tips for a High-Return Build

All told, Jane and Tim failed to separate their personal tastes from their investment decisions. They got caught up in the dream, allowing their emotions — rather than the market — to guide them.

Every investment has a point of diminished returns, and unfortunately, Jane and Tim far exceeded theirs, failing to optimise their resources for maximum ROI.

However, with a little financial prudence, and by focusing on these 3 tips, you can avoid falling into that same trap:

Tip #1: Practicality over size: Bigger doesn’t always mean better when it comes to investment properties. Instead of opting for an oversized home, focus on a manageable, well-designed space that’s easy to maintain and appeals to a broader range of tenants. Smaller homes can often deliver better occupancy rates and returns.

Tip #2: Function over finishes: Luxury finishes might be tempting, but they don’t guarantee higher returns. Tenants are more interested in functionality than in high-end fixtures. Go for durable, low-maintenance materials over extravagant features to keep your costs in check while ensuring long-term appeal and reliability.

Tip #3: Location efficiency: Aim for a property that’s close to everyday essentials like schools, public transport, and shopping centres. Homes in established suburbs, where tenants are looking for long-term stability, tend to outperform remote luxury properties when it comes to rental income.

Take Jane and Tim’s friend Mark, for example.

Mark built a house in a stable, suburban estate. His choices were practical: basic yet durable flooring, standard appliances, and a well-planned but not excessive layout. He ensured the property was close to good schools, public transport, and shops.

As such, his returns were steady, and his occupancy rates remained high throughout the year.

The Takeaway? Build With Your Real End-Goal in Mind

Before you build your investment property, reassess your motivation.

Are you doing it to satisfy your design preferences… or to make a profit?

Taking a step back and looking at the situation objectively, you’ll recognise that a practical, well-located home designed to meet your tenant’s needs — without lavish luxuries — will offer the best financial returns.

With that said, optimising your resources for maximum ROI is just one challenge you’ll face on your investment journey.

So before you start building, download our free guide:

 

Build with Confidence – 7 Things You Must Know Before Designing a New Home.

It will help you avoid common pitfalls and make the most of your investment.

 

Disclaimer: Names and identifying details have been changed to protect the privacy of individuals. These stories are based on real events, and any resemblance to actual persons is coincidental.

 

For more tips to help you navigate the complexities of home building, download our Free Guide

Build with Confidence – 7 Things You Must Know Before Designing a New Home

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