Risk is something that all property investors face, particularly in the Australian property market. But we don’t want to explain to you that high risk equals high return, because that’s very far from what we believe about risk.
Instead, here are the six most common risks investors face, and how they can be easily avoided to help you build a stronger investment property portfolio.
Six Common Investment Property Risks
1. Property Vacancy
After advertising your property for rent, it’s ideal to find a tenant within the first two weeks to avoid slipping down the search results. Making your property as appealing as possible is the key to securing high quality, long-term tenants a lot faster.
Ensure that you’re aware of the median rental price in your area, and charge competitively. Keeping your property in top condition will also increase its face value, and help to keep vacancy periods to a minimum.
2. Interest Rate Rises
When the Reserve Bank of Australia hikes up the cash rate, the banks often follow. With a variable rate mortgage, this means you’re subject to a fluctuating interest rate.
On top of that, in March, the Financial Review reported that banks were to reprice interest-only mortgages to meet tougher regulatory requirements as outlined by the Australian Prudential Regulation Authority (APRA). The aim is to manage heightened risks in a market of steep house prices and high household debt.
This means that along with limited investor loans, investors dependent on cash flows from rental income could see rate rises as high as 2 and 3 percentage points.
Of course, a smart investor can always work within the law and still maintain a financial advantage. More than ever, it could pay to engage with an independent mortgage broker who can sort through the lenders with you. And always stay informed by consulting experts in the know.
These restrictions have added an extra challenge, but plotting your financial future will always require overcoming obstacles.
Both of these factors can be mitigated through taking up a fixed-rate mortgage, and with stringent cash flow management.
3. Liquidity Risks
When we talk about liquidity risk for investors, we’re talking about a cash flow risk and a market liquidity risk. A cash flow risk is a possibility when an investor isn’t able to service the cost of the property.
Market liquidity risk can occur when bad market conditions and a lack of buyers leave an investor selling their property for less.
The question is, what leads to liquidity risk, and how can it be avoided?
To avoid credit risk, it’s crucial to sit down and figure out what you can actually afford by creating a cash flow plan. Often, this cash flow plan can mitigate the risk of market illiquidity and the need to sell an investment fast, particularly in a buyer’s market.
4. Specific Risk
This occurs when an investor purchases a property that doesn’t allow them to meet their financial goals. This can be due to a variety of reasons, but generally due to high vacancy rates, or because they haven’t accounted for unforeseen costs, like maintenance.
One way to work around this is to diversify your investments, and of course, engage with an expert property investor to ensure you’re buying a property with strong potential for capital growth.
5. The Allure of Negative Gearing
Tax breaks certainly sound appealing, but remember, negative gearing is not a positive. You’re ultimately making a loss, and an investment is supposed to bring in value.
6. Personal Risk
There are a number of hiccups you might encounter that could negatively affect the growth of your investment portfolio. If you lose your income due to injury or job loss, this could be a concern for your investment property if you’re not positively geared.
It makes sense to ensure your investment portfolio doesn’t require your own cash to keep it up and running. But in times of high vacancy rates, you might need to make up for lost rent with your own income.
To mitigate this risk, ensure you have personal protection insurances, such as income protection or disability insurance. You’ll have sound piece of mind not just for yourself, but for your family too.
The property investment game is not without its obstacles. That’s why it pays to know how to manage risk, and to engage with mentors who can help you navigate obstacles with ease.
Knowledge is power, and with a little time and planning, you’ll be well placed to grow your investments’ value, and the potential for a financially sound future.
Learn more about the risks of property investment, along with other property investment tips and advice, on the OpenCorp blog today.