Investing in real estate is a long-term plan, but it doesn’t come without risks. A lot can go wrong and you need to know how to avoid these pitfalls or, alternatively, know how to minimise them. It’s always best to seek expert advice, especially if you’re new to the game, but here are some general tips.
What are the risks?
Any investment is going to come with risks. It’s all about understanding how to reduce them and manage them.
Knowing that investing in real estate comes with its own set of gambles doesn’t mean you should avoid it. While property does carry risk, it’s comparably low compared to other asset classes. One key reason for this is that property is a necessity. This underpins its value and makes it less volatile.
Also, research and good planning can mitigate most of the risks involved.
Australia’s rising population is good for property investors. There seems to be a continual stream of possible tenants to fill vacant properties. If you choose a good property in a high demand area and with good amenities, it’s possible that you will never have to deal with a vacant lot.
However, the possibility of a vacant property is a risk you take. There are plenty of things you can do to mitigate this risk including minor renovations or refurbishments, ensuring your property is pet-friendly or by looking at a wider pool of tenants.
Not every tenant you choose is going to be well behaved and you need to understand this before you start choosing. Some may not treat your property well, some may not pay rent on time, and some may even skip town in an attempt to avoid all costs. Sometimes, it’s impossible to see who these tenants are. In some cases, even the best tenants may turn purely because of a change in personal circumstances, for example, a loss of employment.
To avoid this, it’s best to have a property manager on hand. Often, a property manager will be able to recognise the unpleasant tenants from the good ones because they have experience and resources to do thorough background checks. They’ll advise who to choose and then perform regular checks on the property. It’s also recommended that you get insurance to cover anything unexpected.
Change in circumstances
Risks in investing don’t just revolve around the tenant’s circumstances. You may experience change as well.
What happens if you suddenly fall ill, lose your job or split with your partner? Any of these situations can result in you not being able to afford the mortgage repayments on an investment property.
To avoid this happening, take out insurance on your property and for you. This may seem like an added and unnecessary expense, but it’s always best to be prepared. As the saying goes – better safe than sorry!
Interest rate change
At the moment interest rates are great for investors, but this may change. With banks already having to manage the compulsory interest rate change for investors, it’s likely that this will impact investment property portfolios.
Also, as with anything in life, the interest rate will change and it will rise, so it’s important to be prepared. Never over-commit because you’re confident in a current interest rate. Ensure you can pay all repayments, even when the interest rate goes up. Talk to experts about what to expect in the coming years so you can prepare for it.
Consider keeping a financial buffer in place, such as a line of credit or an offset account attached to the loan so you are prepared for any financial changes. Also, speak to an expert about the kind of loan you have taken out and whether it’s advisable to change it to a fixed or partially fixed loan.
It may look bright and shiny now but in a few years time, your property may need a facelift, and over time, there will definitely be some maintenance issues.
This is where a property manager can help out. By inspecting the property regularly, your property manager is a trustworthy source on whether maintenance is necessary, and whether it needs to be more than just a routine fix.
Never ignore maintenance issues, especially if they seem routine and mundane, because they can grow to something bigger.
Make sure you have a financial buffer to cover any expected and unexpected upkeep costs. Appliances need to be changed, walls occasionally need to be painted and bathrooms sometimes leak. Be prepared for these so you don’t run the risk of losing good tenants because you can’t afford to fix something.
Fluctuating housing market
The housing market peaks and dips and this variation is a risk you take when purchasing an investment property. The cyclical nature of the property market is largely dictated by economic factors, consumer sentiment and spending. To control the risk better, choose your property wisely, by considering location, amenities, condition and extra features.
Reducing the risks
There are some key things you can do to mitigate the risks involved in property investment.
- Do your homework. Ask the right questions of agents and experts, choose your location wisely, and look at properties carefully before jumping in.
- Choose your finance wisely. Purchasing an investment property is just as much about the loan as it is about the property itself. Finding a good loan deal can mean a huge difference to the net return on your investment and can significantly reduce financial risks associated with investing. Having a trustworthy lender behind you also means you can approach them for help when needed.
- Diversification is key. If you’re going to have a property portfolio, steer clear of choosing one particular area, but rather, look to purchase many types of properties in many locations. Don’t be afraid to look interstate. You’ll be exposed to a number of different markets and market cycles, minimising your overall risk.
And finally remember, investing in property is a long-term strategy. While the beginning stages of purchasing a property are expensive, these will even out in the end if you hold onto the property long enough. Sell too soon and you may even end up missing out on potential gains. Property prices don’t rise overnight.