Like with anything in life, property investment comes with risk.
Real estate comes with its own set of cautionary tales about the potential hazards and pitfalls.
Many things can go wrong and the risk is amplified if you leap in without first seeking professional advice and devising a sound strategy and investment plan.
But of course this doesn’t mean you should avoid property investment.
Here’s a Transcript of the interview
(Alternatively you can listen to the short podcast at the top)
Kevin: Michael, could you please take us through the things that you find that can actually reduce our risk exposure when investing in property.
Michael: I think this is a good topic because it’s one of the things that holds people back.
They’re worried about all the things their friends tell them can go wrong, and so therefore they don’t go ahead and invest.
Of course, that’s not a reason not to invest.
But it is important to know what the potential risks are and be prepared for them.
Kevin: What’s the first one?
Michael: One of the big risks that people are scared of is a vacancy in their property.
They’re worried that the property is going to be vacant for a long period of time and they won’t have rent coming in and they’re not going to be able to pay the mortgage.
Today vacancy rates are a little higher than normal, and that means rents aren’t moving up much, but if you price your property correctly – and if you have the right sort of property – then vacancies shouldn’t be more than a couple of weeks.
The way to minimise vacancies is buying the right property in areas where there’s a wide demographic of potential tenants.
That’s why I avoid mining towns, regional areas, and holiday locations, because that’s where you tend to get the large fluctuations. Sometimes lots of people are looking and at other times hardly anyone will want to rent your property.
Kevin: Would this also apply with commercial property?
Michael: It’s much the same.
Location is critical for the performance of commercial properties. You want to be in the main roads where there’ll always be lots of people walking past to help pay the rent for the tenant of your property.
Another way of minimizing the vacancies is having a good property manager who is up to date, proactive, has all the latest software, and can get your property let quickly.
The last way, of course, is to make your property appealing.
Increase its appeal by keeping it spick and span, up to date, looking nice and appealing.
Kevin: Getting the right tenant and not a horror tenant is pretty important, too.
Michael: We’ve all seen those episodes on A Current Affair where they chase the bad tenants down the street because they trashed the little old lady’s property.
Unfortunately, there are some tenants who let you down, but having a good property manager select your tenants is important.
The other form of protection is having insurance.
Kevin: Some people are also very concerned about some of the things that might occur that we don’t expect to happen – like being unemployed, for instance.
Michael: That’s another issues that worries people.
That’s the reason I always talk about having a financial buffer in place.
Apart from protecting the property, you also have to protect yourself and your finances by having a a line of credit or an offset account where you have some money for those little surprises.
Additionally, having adequate insurance – for not only the property, but also yourself.
It may seem like a bit of an expense today, but if things go wrong, having that insurance is going to get you out of hot water.
Kevin: Talking about that buffer, what about chasing interest rates?
Michael: What’s happening is that people are committing themselves to investments today in a low-interest-rate environment, but this too shall pass and the way of the economic world is that interest rates will go up again.
One way of protecting yourself is having a financial buffer.
Another way is to consider locking in a portion or all of your interest rates at the moment, and that will give you a level of security.
Another concern of potential investors is unexpected maintenance issues, because things do go wrong even in new properties.
Again, you need to set aside a budget.
One of the mistakes investors make is not leaving aside a bit of money each year for the hot water service that blows, or something else that goes wrong, and every five or seven years you might have to paint the property, and every ten years, you may have to put new carpets in.
So, be prepared for it, budget for it, have that buffer, and you won’t get caught out.
Kevin: What about the highs and lows of the market?
Michael: That’s another thing that scares investors.
At the moment, everybody is on a bit of a high and the property markets are doing well, but wealth creation is a long-term strategy, and therefore investors shouldn’t be scared by the ups and downs of the market.
They should be prepared by buying only investment grade properties, those that are going to be stable in value.
Buying in the big capital cities where there are multiple pillars of the economy and wages growth underpinning their property values growth.
That’s going to ensure that they’ll be able ride through the ups and downs, as opposed to buying in mining towns, regional towns, or other areas where when property values plummet.
Michael: My pleasure, Kevin.
Listen to the full show at RealEstateTalk.com.au and while you’re there subscribe and receive our weekly podcast (or the transcripts) where I interview Australia’s leading property experts.