Property investment pitfalls – and how to reduce your risk 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 a lot less risk than other comparable asset classes, such as shares, due to the fact that it is an essential commodity.

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

So here are some of the ways you can plan ahead in order to overcome any obstacles that you might encounter:

1. Vacancy

At present the vacancy rate in our capital cities varies from around 2% to 3% but of course there are some pockets where there is an oversupply of properties for lease.   

And even in times of significant oversupply, the vacancy rate rarely exceeds 6% in Australia.

So you see, 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.

Of course you can increase your property’s appeal to 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 making allowances for things like pets.

And with a good property manager proactively promoting your property, the down time between tenants can be minimised.

2. 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 ladies 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 someone who seemed a good tenant can convert to a bad one pretty quickly through unforeseen changes to their personal circumstances, such as loss of employment, illness or divorce.

On the other hand there are a group of tenants out there who seem to enjoy playing a game of annoying their landlords.

That’s why 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 from their years of experience.

Most importantly, you should protect your property with adequate insurance coverage, including adequate building and landlord insurance policies.

3. Life’s little surprises

Life is full of surprises.

One minute you might be gainfully employed with not 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 generally it occurs in the blink of an eye.

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

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.

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

First and foremost, make sure you have adequate insurance.

Not just for your property, but for you too!

But don’t fall into the trap of buying cheap insurance or line or one of those TV specials.

Get your risks professionally assessed by a professional.

Sure it’s an extra expense, but 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 some type of reserve set aside for those unforeseen rainy days.

4. 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.

It is just the economic way of the world.  

Again, the key is to be prepared.

Do not over-commit because of our current low rate environment – make sure you can afford your repayments even if rates rise as a few percent – because they will.

That’s another reason to have that financial buffer in place - just in case your repayments become difficult to manage down the track.

And finally, consider fixing a portion of your rates while they are low.

Again this is where you’ll need professional and independent advice.

5. 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 but can be a 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 so you can pay for a new hot water service or replace an appliance on its last legs when you need to.

6. 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.

In other words, you don’t really have control of what market movements are doing to the price of your property at any given time.

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

The “investment grade” properties we buy for our clients at Metropole have never crashed per se.

Sure their prices have corrected at time,  but they’ve outperformed the markets.

Sophisticated investors don’t speculate on the next big thing or the next “hotspot.”

They buy “investment grade properties” which are well located and in constant demand from buyers, with excellent amenity in an established inner city suburb that has historically outperformed the averages.

They then hold onto their assets through the good times and bad, knowing that the capital gains made over time will outperform the averages.

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 these little real estate rainy days can cause.

SO, HOW DO YOU FIND THESE GREAT PROPERTIES? 

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.