Whether you’re new to property investing or you’ve been building your portfolio for many years, one thing remains true – there’s no such thing as a risk-free investment.
Blogger: Philippe Brach, CEO, Multifocus Properties and Finance
Worth noting that this is true with any kind of investment, be it shares, property or options. Obviously the lower the risks, the lower the rewards. The trick is to find an investment strategy you feel reasonably comfortable with.
Yes, experience can help you fine tune your approach. And it’s also true that a financial education can help you make smarter, more informed decisions. But the fact remains that every real estate investment you contemplate comes with inherent risks.
That said, there’s no need for you to lose sleep wondering about all the possible “what if” scenarios that could eventuate. Instead, I prefer to be solutions-oriented by coming up with strategies to neutralise any fears or risks upfront. These include:
Risk 1: The tenants could damage the property
Neutralise it by: Getting landlords insurance
Landlords insurance should be mandatory for all property investors, in my opinion. It gives you peace of mind that you’re financially covered if your tenant does the wrong thing. You wouldn’t drive a new car out of the car yard without insuring it, so why would you invest in a massive asset without insuring its income-producing capabilities?
Risk 2: Tenants who don’t pay the rent
Neutralise it by: Strong property management
While landlords insurance can help in this instance as well, another measure of protection is a top quality property manager. They do vigorous screening and reference checks on your behalf in an effort to place the most suitable tenant in your property. Also, they have a vested interest in finding you the best possible renter in your market and price range – because it’s the tenants who do the wrong thing that cause property managers the biggest headaches.
Risk 3: Owning a property that fails to grow in value
Neutralise it by: Doing your due diligence
Often this type of situation eventuates because an investor rushes in to a property purchase, lured by sensational headlines or slick marketing campaigns. The only way to combat a negative equity property experience is to do your due diligence early on to find a property located in a growth area, where amenities are in abundance, where vacancy rates are low and where there are plenty of renters. These suburbs can be found all over Australia, it’s just a matter of knowing where to look!
Risk 4: Losing your job and being unable to afford your investment property
Neutralise it by: Having a buffer and getting life and income protection insurance
I would never advise a person to invest in property if it would leave them with no savings in the bank. You need at least a few months’ worth of living expenses accessible (via savings or equity) to help you manage financially should you lose your job. Again, insurance can be another strong fail safe here, as a good income protection policy will provide you with financial comfort if you’re unable to work due to illness. It's worth noting that if you lose your job and it takes you, say, a couple of month to get another one, you will not lose your tax deductions for these two months, they are just carried forward until you start paying taxes again, at which point you “claw back” your tax deductions.
Risk 5: Buying a property that drains your financial resources
Neutralise it by: Having a clear investment strategy
If you have a negative geared property, it could be draining your pockets by, say, $100 per week. That’s generally quite a manageable sum. But what if you invest in five properties, and all five of them are costing you $100 each? That’s $500 per week or $26,000 per year that you need to come up with – which could put you in a financially precarious position.
One solution could be to add some positive cash flow properties to your portfolio to neutralise your books. You’ll never know, however, unless you have a clear and concise investment strategy that maps out where you are now and where you want to be. Without an investment strategy, you’re speculating rather than buying with purpose, which is a dangerous way to navigate real estate.
Ideally, every property you own will be a hassle-free, high yielding property that performs exactly as you want. Obviously, this may not always be the case! But with the right risk management tools in place, you can work towards building a profitable property portfolio with minimum fuss and maximum results.