Managing (or even eliminating) risks when investing in property (part 1)
Fear stops us from taking action, as actions may lead to great results, average results, or even poor results. The difference is the right knowledge, – often obtained from the right professionals in your team. As a (potential) property investor there are many risks to be aware of when it comes to property investment. This is part of the reason why only a small part of any population invests and ultimately reaps those rewards. With the right information and strategies, most of these risks can be either eliminated or mitigated down to very low levels – giving you the ‘sleep well at night’ benefit.
In part one of this topic, I’d like to cover off some of the most common risks and strategies to deal with them.
- Price – ‘Am I paying too much?’
A good investment turns into a bad investment when you pay too much. It is always important to compare any price to similar properties in the surrounding market – this is called ‘comparable sales’ by valuers. Although rather than just comparing high level information e.g., a 4 bedroom & 2 bath property with another – it is very important to compare ‘apples with apples’. For example, amenity, floorspace, age, land size, school zone, walkability (e.g., to train station), slope of the land (as this could incur large, unexpected site costs), restrictions from Owners Corps, etc. Additionally important is how its price compares to the overall market – e.g., buying in the lower price quartile, means more buyers can afford to buy it, is usually underwritten in value by the input costs of land, materials, labour, Gov charges, etc, and has less price volatility than expensive properties in the top quartile.
- Vacancy – ‘What if I can’t get a tenant to pay the rent?”
It is very important to have a property that appeals to potential tenants – so it rents fast, rents high, and rents for a long time. Tenants usually prefer new properties, where everything is clean, works, low maintenance and energy efficient to save them money. Equally as important to getting a good tenant is the property itself being in the right location with surrounding amenities such as walking distance to a good school, train station, shopping centre, parks, etc. Due to the recent ‘working from home’ phenomena, many renters are moving out of the city and into the suburbs to larger homes that provide an extra bedroom to be used as a study. Plus, they are prioritising communities with much more open space over small city apartments. Tenants are also looking for ‘premium’ features – these could include gourmet kitchens, air conditioners, high end fixtures and fittings, etc. A good tip is to ask a local property manager what tenants are looking for and prepared to pay extra for (especially if they have a waiting list of tenants)– and target those sorts of properties to buy.
- Property Damage – “What if a tenant damages the property or it burns down?
There are different types of insurance policies that will cover different parts of this. ‘Landlord Protection Insurance’ usually protects a landlord from malicious damage from tenant, and some will even provide payments for missed rental payments. Building insurance will cover the building if it burns down, but if you are part of an Owners Corp oration – you’ll usually find that this is covered in the Owners Corp fees. If there is anything wrong with the building structure – new (but not existing properties) are covered by a builder’s warranty – usually about 7 years in Victoria. However, one of the best ways for a landlord to protect themselves is by having a good property manager who deeply vets any potential tenant. Also, the property manager can usually direct you towards a range of insurance policy providers.
- Interest rates – ‘What if Interest rates go up, will I be able to afford the mortgage repayments?”
Often having a large amount owed to someone else is a cause for anxiety for many. However, mortgages can be managed strategically for less anxiety. Consider fixing your interest rate for guaranteed payment amounts so you can budget – some financiers offer fixed rates for up to 5 years. Consider using interest only for the initial loan period instead of principal & interest to minimise cashflow. A major advantage of property over other assets like shares is that they are not re-valued continuously throughout a trading day – in fact properties are usually only re-valued when you request them to be, hence they are not subject to ‘margin calls’ where you may need to suddenly inject a lot of cash within 24hrs like a loan on shares. Speak to a mortgage broker experienced with property investors for further information.
- Capital – ‘What if I have to sell it, will there be buyers, will I lose money?’
The world’s most successful and favorited investor, Warren Buffet, says his number 1 rule of investing is ‘don’t lose capital’. Many people choose to buy property as a hedge against inflation, so they make money in real terms (i.e., after inflation is subtracted). However, many investors had a rude awakening when they went to sell their inner city non-landed apartments in Melbourne (and Sydney too) during the pandemic. This was due to the lack of students, tourists, and short stay businesspeople looking to rent them – so they received no rent to service their mortgages. When they tried to sell them, they found that they could only sell ‘used’ property to locals, – and that locals didn’t want that type of accommodation (both own stay and investors), so they sold their properties for much less than they’d hoped for (some even below the price they had paid years ago!). It is so important to buy the type of property (in any market) that the majority want and can afford – in Australia that is landed bungalows. Also, if these landed bungalows are in communities with great amenity, then you are likely to achieve an even greater capital profit over time.
Resimax Group provides many protections against these common risks with its industry leading 5/10/20 guarantee. That is 5 years capital protection, 10 years monthly cashflow guarantee to underwrite your rent (plus you get the upside when the rent increases!), plus a near tripling of the government’s statutory 7-year building warrant to 20 years. Speak to us to find out more.
Next month, we’ll continue this topic of property risks with part 2, by outlining some of the more uncommon risks and strategies to deal with them.
Disclaimer: This article is for general information purposes only and should not be taken as advice. Always seek professional advice from suitably qualified professionals familiar with your situation and goals.
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Steven Molnar is Head of Research and Education for Resimax group. With over 25 years in property and finance in Australia and internationally, he brings a unique perspective to each interview with interesting guests and property insights. Resimax group is one of Australia’s largest private property developers, Resimax Group Investor is headquartered in Kuala Lumpur MY.