Managing Property Investment Risks

There are many risks associated with investing regardless of your level of experience.  Some investors invest in property that they perceive to be risk free, however this may not be the case.  Risk does exist, and so there are ways to manage these risks.  Below we outline some of the risks you may encounter along with information on possible ways to manage them.

Potential Risk

Risk Management

 

 

 

Interest Rate increases

 

Fix the interest rate on the loan to help plan for repayments for a nominated period.  Do your research, often the structuring of your loans can be more important than just getting the cheapest rate.  Speak to a mortgage broker if you are unsure.

An increase in interest rates relates to a greater expense and where a property is used to produce income this can be offset slightly by the increasing tax deductibility.

Typically as interest rates increase so too does the demand for rental property (increased rental demand) as first homebuyers are pushed out of the purchasers market. Rental income streams can rise with interest rate hikes which can offset such increases.

Alternatively it may make sense for you to keep extra cash or equity on hand as a buffer.

 

Tenant Damage

 

Suitable insurance policies have been designed to protect landlords against tenant damage (consult with an Insurance Adviser/Broker). This policy is often referred to as Landlords Insurance.

 

 

Natural Disaster

 

Suitable Landlords Insurance can protect against fire or flood, etc.  Make sure you get all the details about the policy to ensure it covers you appropriately, read the fine print to see if there are any clauses or exclusions. (Consult with your General Insurance Adviser / Broker).

Unemployment

 

If unemployment occurs due to retrenchment or other reasons it then becomes a question of the duration of unemployment.  Assuming this event is short term the effects can be managed through budgeting, cash savings, equity and access to other income streams.

 

 

 

Capital Depreciation (loss on property value)

 

Conduct research of the historical performance of an area.

Research comparable properties in that particular area. Although historical evidence and trends do not guarantee future performance it may provide some basis to assist you in making an informed decision.

Research into development of infrastructure within the area of the property may identify factors that could lead to capital depreciation such as zoning changes.

 

 

 

Prolonged Vacancy Period

 

You can reduce the rent to meet market demand while it recovers or consider other ways to make it more attractive to rent such as a some capital improvements like paint, carpets and internal appliances.

 

 

 

Poor Building Work

 

If buying off the plan, research the developers past completed properties, or have someone it for you like a registered property agent.

If buying an established property, have a building inspection done by a qualified building inspector.

 

 

 

Investment Gearing Risk

 

Gearing levels should be set in accordance with an investors comfort zone and may be reduced by placing spare cash flow into the repayment of the borrowed principle. Also the banks have specific limits they will lend you based on your income, assets and property valuation.  A typical investor may borrow up to 80% of the asset value before additional costs are incurred such as mortgage insurance.

 

 

Loss of Income

 

 

If unemployment happens due to sickness or accident suitable insurance policies are available such as income protection, trauma insurance and life insurance, specifically designed to manage this risk. There are many things you need to consider when getting insurance, so getting professional help should be a priority.

You can get a free professional insurance quote using our enquiry form http://www.mymoneycalculator.com.au/free-insurance-quote/

Alternatively consult with a financial adviser or Insurance broker.

 

 NOTE:  Most investments bear some risk and property is no different.  Your ability to manage these risks will provide potential to generate wealth successfully over the longer term.