Risk means different things to different people.
For example, why do so many people put themselves at potential risk with different sports?
I love to go surfing at my local beach. But I know many people are terrified about the thought of going into the water where I surf. I’ve had people question the threat of potentially dangerous marine life. Some are fearful that they’re not good enough swimmers or don’t have an adequate skill level to surf. And many are worried that there’s no lifeguards! So, for some, the reasons not to go, or the fear associated with the activity, means they overlook all of the benefits.
But I surf in spite of those risks because it’s great exercise, it feels like a meditative experience and those feel-good endorphins that are released while I surf far outweigh the risk any potential danger. As much as we like to think we make decisions based on logic, much of the time, our choices are made at an emotional level.
In reality, many of life’s choices can be thought about in a similar way. There is a risk associated with most decisions and it’s up to the individual to weigh up the pros and cons.
The same applies to property investment. Investors also need to consider all of the pros and cons. At Capital Properties we work with Investors every day. We help guide them through the property investment process logically and take time to consider any risks. Here’s what many of our Investors consider to be the greatest potential risks:
- Not being able to make mortgage and/or interest payments
- Tenant damage
- No rental income
- Property value doesn’t grow
- Slow process to transact
- Expensive asset to transact
We’ll break each of these down in detail below.
On the go? Here’s 30 seconds of take outs:
- Property investment comes with some risk. But like life, most risk can be managed
- Speak to your lender if you foresee an issue with mortgage/interest payments
- Pre-purchase research will help avoid poor rental returns and loan payment delays
- The right insurances can minimise the fall-out from tenant damage
- A ‘Switched on Strategy’ will help you manage a period of no rental income
- Be aware of the transaction period for finance approval process and settlement
- Perpare to manage the costs associated with purchasing real estate
Keep reading >>
The greatest risks in property investment
What happens when you fail to make mortgage and/or interest payments?
Apart from rental payments, mortgage repayments are usually the single biggest expense people have. The fact that you have a loan with your property means you’ll need to make regular interest payments. Paying those loan repayments on time is the ‘secret sauce’ to help you get funding for future loans, so it really is vital. Here are some ways to manage the risk of late payments:
Get in contact with your lender
If you’re in a situation where you think you won’t (for whatever reason) be able make your mortgage repayments on time, don’t choose inaction. There ARE options available to help you. Banks are always willing to work with you through tough periods, so it’s important to get in contact with your lender straight away and let them know exactly what’s going on. They’ll work with you to find a way to make it easier for you to make the repayments.
Make your loan repayments on time
In recent years banks have introduced an internal scoring system measuring when loan repayments are made. If late payments happen it could affect your ability to access potential changes to the loan or any future loans with that lender.
Seek the right rental returns
To ensure you make your loan repayments on time, you need to have your property in the right location, with the right tenants and with the right returns. All of these factors should be considered when you do your pre-purchase research.
If you’re in the property market for long enough the day will unfortunately most likely come when you’ll have issues with tenants – where for various unforeseen reasons, they’ll damage your property.
So, before this day comes, it’s important for you to get the right insurances in place. See our blog: How to choose the right insurances for your investment property for more details.
The soldiers 5 on property insurance
- Take out Building & Landlord insurance
- Use a company who specialises in insurance for property investors
- Read the fine print! Some insurances don’t cover everything
- Check the range of cover, for example, check if it includes natural disasters
- Add 20 – 30% on top of the estimate to rebuild every couple of years (building insurance)
If and when it does happen, and your property is damaged, your Property Manager can make the claim and liaise with the insurance company on your behalf. You might need to pay an excess (fee) to make the claim, but thereafter your Property Manager can arrange the trades to rectify any damage and make everything good as new again.
No rental income
Having a period of no income or rent will be a high likely hood at some point. Especially if the property is empty between tenants. However, there are ways to reduce the length of the vacancy. When do your pre-purchase research you must consider several fundamental factors like owner occupier / rental ratios, vacancy rates (these may change after you purchase), demographics, average suburb income and the design of your new purchase.
We’ve discussed these in our Switched-on Strategy Series Blog.
Property value doesn’t grow
No-one has a crystal ball to predict how much the median house price in any area is going to grow by. But we can look at historical trends to help us make the best judgment call on whether now is a good time to buy in a specific area. Generally, high demand means a consistent growth.
Income producing asset
Even if you didn’t time the market well and you’ve held your property for a few years but haven’t seen growth, you will still have an income producing asset.
If growth is a bit slow, it’s possible to convert your property to a principle and loan to reduce the debt. Or you can make extra payments to increase the equity position.
Highly tax efficient
A brand-new property will be highly tax effective so you can use the tax breaks you get from the asset to reduce the debt. Then, once the debt is paid-out, the overall risk is removed.
Slow process to transact
Buying and selling property is a slow process. A typical property purchase averages 4 – 8 weeks including the finance approval process and settlement. Being ill-prepared means an even slower transaction.
Expensive asset to transact
There are many costs associated with purchasing real estate, including:
- Stamp Duty
- Bank fees
- Legal fees
- Agent fees
- Legal fees
- Renovation costs
Need help? Where to start?
Capital Properties can assist with builds in Wollongong, Western Sydney, Central Coast, Newcastle, Hunter Valley, Port Macquarie, Northern Rivers, Goulburn, The Mid to Far North NSW Coast and many other areas.