Property Investment Risks
There’s no doubt that investing in property can see you earn an extra income, but it can also fail dramatically too. What are these risks and how can you avoid them? We want your property investment portfolio to be a successful one, so we’ve taken down some pointers on what we know about property investment risks.
Change In Market Conditions
The problem with the property cycle is that it can’t truly be predicted. The value of your investment property will go up and down and you probably won’t be able to guess when these changes will happen.
Although property is often predicted to have a nine or 10-year cycle, this is not always the case as larger economic factors can always affect the market at any time. Certainly in the short term, it is almost impossible to predict what the market is going to do.
This is why investment in property should always be considered in the long term. You should purchase the property with the plan to hang on to it for a few years at least, in order to see you make money from your asset. This way you can generate a steady income from the tenants and hopefully some capital growth when it’s time to sell.
When to enter and exit the property market isn’t an exact science, which is why you perhaps you shouldn’t invest in property at all if you are completely risk-averse.
Change To Lending Requirements
Over recent years, there have been changes to lending requirements in order to slow down investor lending. This can affect you if you are looking to grow your investment property portfolio.
For example, stricter guidelines mean that in some cases investors have to come up with a 20% deposit for the property – difficult if this is your first foray into investment property buying.
If you already own investment property, changes to lending requirements can also mean an increase in home loan interest rates, which equals an added cost.
To avoid these changes as much as possible, it’s important to be thorough in your research ahead of a purchase.
Loss Of Income
If you lose your income, there’s a chance that you might not be able to afford the mortgage, and this is a real risk for property investors.
A loss of income could come from losing your job, but it can also be created from a loss of a tenant and not being able to find someone else to rent the house.
It’s not good practice to force a sale when the time might not be right, as there is a higher chance that you might lose money on the deal. But often this is what can result if you lose your income, and is one of the most common property investment risks.
If you have used debt (gearing) to purchase your investment property in the first place, then a lack of cash flow may cause you problems when you find you cannot repay the loan.
Sometimes the location of your property can cause its own risks, too. Although you’ll hopefully have done your research into the location of a property before you buy, sometimes changes in the environment are out of your control.
For example, a large housing development might be built nearby, causing congestion in the area, or a freeway extension to your suburb might be delayed. Or perhaps there’s a bushfire in the surrounding area and this negatively impacts the look and feel of the neighbourhood.
It’s important to carry out thorough due diligence on the location of a property before a sale to minimise your property investment risk as much as possible, although sometimes this can be difficult to assess for the entire length of your ownership of a property. Try and see if you can get your hands on any large scale development plans for the area, however.
If you’re purchasing a number of investment properties, you could always choose different locations for each one, and, in this manner, diversify your risk.
Tenant And Leasing Risks
Normally you’ll rent your property for a year at least, and although there are downsides to having an empty property when you’re looking to rent it out, there are benefits if you’re wanting to sell. A vacant property will normally do better on the sales market than one that currently has a tenant.
When finding someone to live in your property, it is important to look into their background and rental history, so as to be sure you understand the kind of person you are trusting your property with.
Ask the tenant why they are moving and look out for any mentions of them not getting along with their neighbours or landlords. If the tenant wants to move in straight away, be wary, as often tenants need to give 30 days’ notice, so if they want to move in immediately there might be something strange about the situation. Ask for references from previous landlords too, so you can ensure they are trustworthy.
Also enquire about how much they earn, and make sure it is at least two and a half times what the rent is, as this will increase their chances of being able to make monthly payments.
Try and meet everyone who will be moving in to your property too, so you can get a sense of numbers and what they are like. Ask if they have any pets and what they are – you might decide pets aren’t suitable for your property.
Unfortunately, no matter how well you research a tenant’s history, sometimes they will default on their rental payments and this can cause you undue stress. In order to act on this as soon as possible, it’s often easy to have a real estate company manage your property for you, so you don’t have to deal with lawyers and tenants directly.
You also can’t plan ahead for the state of your property is left in when the tenants themselves depart. This is why it’s important to ensure the tenants pay a bond upfront, so if there’s any damage done to the property during the rental period, you have some cash to cover the costs.
We hope this article has covered the property investment risks with ownership and helped you understand what is involved in managing a property portfolio.