How to reduce property investment risks exposure

As with any type of long-term wealth creation vehicle, 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 does that mean you should avoid property investment entirely?

Of course not!

For one, property carries less risk than other comparable asset classes such as shares, due to the fact that it is an essential commodity underpinning its value and making it less volatile.

Further, many of the risks associated with property can be mitigated with good planning and anticipation of the various things that can go wrong,

So here are some of the ways you can plan ahead to help you overcome some of the obstacles that you might encounter.

Vacancy

Currently, vacancy rates have crept up a bit as a result of the Coronavirus problems, but our rising population means that we have a continuous conveyer belt of new tenants looking for accommodation.

Even in times of oversupply, other than in selected markets such as mining towns or regional locations, the vacancy rate rarely gets above 5%.

This means by selecting the right property – one that is in continual demand due to its location and amenity – there’s little chance of your property languishing on the market untenanted for any more than a  few weeks in between tenancies.

You can also increase your property’s appeal and make it more attractive to long-term tenants by doing some minor refurbishments and cosmetic updates if things start to look a bit tired, or by being fur friendly and allowing pets.

And a good property manager looking after your investment should be able to minimise the gap between tenants.

Undesirable elements

We have all seen the horror stories on current affairs programs, with reporters chasing “bad tenants” down the street demanding to know why they “trashed” some poor old lady's investment property, leaving her with thousands of dollars in repair bills.

Then there are the tenants who fail to pay their rent for months, only to skip town in a bid to avoid paying the arrears owing.

Unfortunately seemingly good tenants can become bad ones, sometimes because they are well-practiced at lying but often through unforeseen changes to their personal circumstances, such as loss of employment, illness, or divorce.

This means a professional property manager who follows strict screening processes is a must.

More often than not they will be able to identify the good versus bad candidate using their years of experience.

Of course, you should also protect your property with adequate insurance coverage, including adequate building and landlord insurance policies.

Life’s little surprises

Life is full of surprises.

One minute you might be gainfully employed without a care in the world.  

The next, you could fall ill, lose your job, and end up in a messy divorce.

It can happen to any of us and sometimes comes out of the blue.

If you find your financial circumstances change to the point where you can no longer afford the mortgage repayments on your investments, or have difficulty meeting your loan obligations, things can get tricky.

While you cannot predict where life will take you, you can be prepared.

Again, there are a number of things you can put in place to get through these tougher times.

Firstly, make sure you have adequate insurance.

Not just for your property, but for you too!

While it may seem like an extra expense, this is really just another cost of doing business.

It is also important to maintain a financial buffer, such as a line of credit or offset account attached to your loan, so that you can have a reserve set aside for those unforeseen rainy days.

Interest rate roundabout

Right now, the interest rate environment is perfect for investors.

But as with everything in life, this too shall pass and we will one day be confronted with rising interest rates, even though that's likely to be a number of years away.

It is just the economic way of the world.

Again, the key is to be prepared.

Don’t over-commit because of our current low rate environment – make sure you can afford your repayments because one-day rates will rise more than a few percentage points.

Additionally, keep that financial buffer in place just in case your repayments become difficult to manage down the track.

And finally, consider speaking with your advisers about the possible benefits of fixing a portion of your rates.

Unexpected maintenance issues

You can guarantee that regardless of how new and shiny the property you buy appears, one day you will get a call from your property manager about a maintenance issue.

These problems are unavoidable and can be a major drain on your bottom line if you are not properly prepared.

Never ignore maintenance issues as they will only get worse and can cause you to lose good tenants.

Instead, make sure you have put aside some extra pennies in that financial buffer I keep reminding you about so you can pay for new hot water service or replace an appliance on its last legs as and when you need to.

The highs and lows of housing markets

Investors understand that our property markets run in cycles, with values rising, stagnating, falling, and rising again.

This cyclical movement is driven by economic factors, along with consumer sentiment and spending.

This means you won’t have any control of what market values are doing to the price of your property.

Again, it is about being well prepared and investing wisely.

Properties that I call “investment grade” have never crashed per se, but rather they correct a little when the market takes a breather.

Smart investors buy well-located investment-grade properties, the type that are in constant demand from buyers, and with excellent amenity in an established inner-city suburb.

These are the types of property that have outperformed the averages historically and have not fluctuated significantly in price.

They hold onto their assets through the good times and bad, knowing that the capital gains made over time will get them out of the “rat race.”.

The bottom line is, you can never predict the pitfalls you might face as a property investor.

But you can be prepared.

The key is in buying the right type of investment and setting yourself up with that all-important financial buffer to alleviate the potential stressors the real estate rainy days can cause.

Now is the time to take advantage of the opportunities the current property markets are offering.

Sure the markets are moving on, but not all properties are going to increase in value. Now, more than ever, correct property selection will be critical.

You can trust the team at Metropole to provide you with direction, guidance, and results.

Whether you’re a beginner or an experienced investor, at times like we are currently experiencing you need an advisor who takes a holistic approach to your wealth creation and that's exactly what you get from the multi-award-winning team at Metropole.

We help our clients grow, protect and pass on their wealth through a range of services including:

1. Strategic property advice. – Allow us to build a Strategic Property Plan for you and your family.  Planning is bringing the future into the present so you can do something about it now! Click here to learn more
2. Buyer’s agency – As Australia’s most trusted buyers’ agents we’ve been involved in over $4Billion worth of transactions creating wealth for our clients and we can do the same for you. Our on the ground teams in Melbourne, Sydney, and Brisbane bring you years of experience and perspective – that’s something money just can’t buy. We’ll help you find your next home or an investment-grade property.  Click here to learn how we can help you.
3. Wealth Advisory – We can provide you with strategic tailored financial planning and wealth advice. Click here to learn more about we can help you.
4. Property Management – Our stress-free property management services help you maximise your property returns. Click here to find out why our clients enjoy a vacancy rate considerably below the market average, our tenants stay an average of 3 years, and our properties lease 10 days faster than the market average.

About Brett Warren Brett Warren is National Director of Metropole Properties and uses his two decades of property investment experience to advise clients how to grow, protect and pass on their wealth through strategic property advice.