The most popular Australian real estate investment clearly has been residential property but the pitfalls are numerous so, how does one make a wise investment and when is the right time to sell out?

Australian cities are full of residential property investment opportunities - flats, townhouses and houses. However, with recent interest rate hikes and so much conflicting information available within the market, it is difficult to know what to buy, when to buy and when to sell.

George Kafantaris from Metropole Investment Strategists identifies a number of pitfalls that investors fall into when purchasing residential property.

“Buyers do not have a strategy, so they really do not understand why they are buying investment property and what are the outcomes of their investments,” George says.

“One of the other pitfalls that we see is that people do not do their homework and research prior to the purchase, and prior to the signing of the contract. So they’ll go out, sign a contract, and then see their financial broker, they’ll then see their accountant, they’ll then see their solicitor. All of the research should be done prior to signing a contract.

“Another one of the pitfalls that we see in buying residential property is that there really is no game plan, and there is no exit strategy, so they haven’t put into consideration what happens if interest rates do go up, what happens if the property is vacated. They don’t look at the picture holistically.”

When to buy? According to George, it’s important to understand the individual market you’re investing in before purchasing a property.

“There are what we call property cycles, and different segments of the market will behave differently,” George says.

“Buying investment property should not be an emotional decision. It’s a decision made on mathematics and research. So if you understand the property cycles, and you understand that different property within the property cycles behave differently, then you make a more informed decision, and make it a good time to sell.”

When to sell? George suggests doing your sums before cashing in your profit.

“Where a lot of the investors make a mistake is that they believe they’re selling at the top of the market. But what they don’t ascertain are all of the costs associated with selling.

“So when you sell your investment property, if you’ve made capital gains, you’ve got capital gains tax. You’ll have selling commissions and you may in fact have loan break-out fees.

“What you end up with, and your net cash result, may be very different to what you first perceived. So if you decide to sell I rarely think you’ll actually pick the top of the market, but if you choose to sell, make sure it’s part of your strategy, not because of fear.”

While property has proved a lucrative investment for many Australians, recent interest rate hikes are ringing alarm bells for many residential property investors.

“At the moment there are more properties available in certain areas then there ever has been before. So interest rate rises do create real fear in a lot of the buyers’ mentality,” says George.

“Whether you’re a property investor or whether you’re a home buyer – and it should be noted that your home is in fact one of your biggest investments – you may make a mistake and sell when you shouldn’t really have to.

“Now interest rate rises are a real cost and they are really hurting a lot of people. What we find is a lot of people in, say, the mortgage belt will sell because they are hurting from the interest rate rises.”

But will this higher level of supply translate into lower property prices?

“In some areas there will be more properties available for sale, and because there’s more supply versus the demand, the property prices that are realised may in fact drop. It’s all because the demand is not as high and the supply is now higher than it used to be,” George says.

“So in effect, will people sell at a lower price than before interest rates went up? In some areas, absolutely.”