Property investment comes with a 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.
Here’s a transcript of the interview:
(Alternatively you can listen to the short podcast at the top)
Kevin: Let’s begin by going through the things that you find can actually reduce our risk exposure as an investor.
Michael: This is a good topic because it’s one of the things that holds people back.
Many beginning investors worry about all the things their mates tell them can go wrong, and so therefore they don’t go ahead.
But that’s not a reason not to invest.
It’s important to know what the potential risks are and be prepared for them.
Kevin: What’s the first one?
Michael: One of the big ones that people are scared of is vacancy.
They’re worried that the property is going to be vacant for a long period of time and they’re not going to have rent coming in and they’re not going to be able to pay their 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 you minimise this is buying the right sort of 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 in rental demand – sometimes lots of people and sometimes hardly anyone wants to rent your property.
Another way of minimising your 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 always keeping it spick and span, up to date, looking nice and appealing.
Kevin: Talking there about property managers, getting the right kind of tenant and not a horror tenant is pretty important, too.
Michael: We’ve seen those shows on A Current Affair where they chase the bad tenants down the street because they trashed this 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.
And of course you should have insurance to protect yourself being caught out by the horror tenant.
Kevin: Some people are also concerned about some of the things that might occur that we don’t expect to happen – like being unemployed, for instance.
Michael: That’s one of the issues that scares people.
They think: “If I take on this big financial commitment and buy an investment property, what can go wrong?”
That’s the reason I always recommend having a financial buffer in place.
Apart from protecting the property, you also have to protect yourself and your finances by having a line of credit where you have some money for those little surprises.
Also, ensure you have adequate insurance – for not just 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: What about chasing interest rates?
Michael: I guess what’s happening is that people are committing themselves to investments now in a low-interest-rate environment, but this too shall pass and interest rates will go up again.
One way of protecting yourself is having a buffer, but 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.
What we’re really doing is running through the concerns people have about getting involved in property, and as I’m trying to show, there are ways of minimizing them.
Another big one is unexpected maintenance issues, because things go wrong even in new properties.
You have to set aside a budget for these little issues.
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, 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.
They can do this by buying in the big capital cities where there are multiple pillars of the economy and wages 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, it gets pretty scary.
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