7 Risks of Property Investment & How to Minimise them

Everyone wants to buy a property that will provide a decent return on their investment.

Yet the property market is full of pit falls for the inexperienced buyer. Fortunately, you can avoid making a rookie error by familiarising yourself with these 7 common property investment risks. After all, when it comes to financial challenges, you’ve got a much better chance of overcoming those that you’re prepared for!

1.      Vacancy: Sometimes No Tenants are Better than Bad Tenants

Don’t forget to factor a conservative vacancy rate into your initial rental income projections. Vacancies happen, and if you’ve got a buffer you’ll be able to ride them out.

Whatever you do, even if you’re desperate, make sure you screen potential tenants carefully and avoid filling a vacancy with tenants who are bad on paper. The potential arrears in rent combined with destruction of property could cost you more than the downtime with no rent coming in would.

Also, treat your rental property like your business and never rent to family or friends. People who you know personally are much more likely to expect leeway when it comes to making payments on time.

2.      Rising Interest Rates

Allow for leeway when it comes to interest rates. Market crashes that push interest rates up are a large reason that many property investors don’t make money. If you can only afford property when interest rates are at an all-time low, it might not be the best time for you to invest.

3.      No Buffer

Make sure that you have a buffer in place, should you urgently need money to make a major repair (replacing hot water, air conditioning, rewiring, oven, plumbing) or you incur another unexpected financial strain.

This buffer could be in the form of savings, a loan with a redraw facility, or liquid assets.

4.      Forgetting About Liability

A tenant that is injured because of your negligence as a property owner has the potential to ruin you financially.

When it comes to you property’s occupants safety, prevention is always better than a cure. Make sure that you or your property manager address any issues raised by your tenants promptly.

And, when it’s time for routine inspections, take the time to follow up on those jobs around the property that were meant to be taken care of.

Getting the right level of insurance cover is also essential for any property owner.

5.      Regressing Suburban Markets

Landlords can often find themselves in hot water when the area their property is in faces a financial downturn.

To make sure that your property keeps growing in value, ensure that it isn’t located in an area that relies on just one industry or company to keep it afloat.

6.      Lack of Knowledge

When it comes to real estate, a lack of understanding can be your biggest downfall. It is not enough to want to make money. If you don’t want to be ripped off, you must educate yourself on:

• How the property market works on a national, state and local level
• The taxes and legal obligations that come with investment property ownership
• How much you should pay for professional services and who to call for what job
• The laws regarding lessor’s/tenant’s rights and responsibilities (and know how these laws differ in other states and territories if you are planning on investing interstate)

7.      Paying too Much

When deciding what sort of offer to make, assume that everything in a property needs to be fixed, unless otherwise specified.

This isn’t the same as lowballing offers – you simply need to see proof that everything in and outside the house is in order before you pay.

Otherwise, you may find yourself falling behind in repair and maintenance costs before your first year of ownership is up, which is a terrible way to start any new investment.

House or Apartment? 4 Reasons Houses Always Make More Money

Two million people are expected to move to South East Queensland in the next 25 years, and 59% of them prefer to live in a home in the outer suburbs than in a high-density apartment in the city.

Australian’s long-held dream of buying the house on a quarter-acre block isn’t going to disappear anytime soon, and for good reason. Home and land packages offer a much better long-term investment than apartment purchases. Here's why:

1. It’s the Land that Holds the Long-Term Value – Not the Building!

Even when you factor in higher entry costs and maintenance expenses, buying a house still provides the best opportunity for capital appreciation.

When you buy a house, it is the land the house sits on that increases in value, not the house itself! As land becomes scarcer (especially close to urban centres) it becomes more valuable, meaning homes with land will appreciate at a faster rate than apartments in the same area.

Now, that isn’t to say that apartments don’t have the potential to grow in value, and some commentators have pointed to figures from the last five years that show apartments outperforming houses when it comes to capital growth.

However, property cycles are longer than five years, and if you look at the numbers over the last decade, houses are still the long-term winners. Over the last ten years, median house prices have increased by 81% - whereas median apartment prices have increased by 72%.

“Historically, over a longer time frame, price rises for houses are greater than that for units, [but] this is not always the case over a shorter to medium time frame," a REIA spokesperson says.

So, if you’re in it for the long haul (as every wise property investor should be), a house is a better investment.

2. Apartment Restrictions Limit Suitable Renters & Future Buyers

While owning your house means you can do whatever you like with it – as long as you stay within council regulations - many restrictions come with apartment ownership. All of these limitations can get your property crossed off a potential buyer or renter’s list.

Pet restrictions: The love of a pet conquers all for many, and if the body corporate forbids furry friends from entering the building, this could be a deal breaker.

Level & ease of access: No matter what level your apartment is on, you’re going to be halving the number of people who want to live there. While DINKs might relish the idea of life on the uppermost floors, young families might be put off by the hassle and risk to children that heights bring. Or, on the other hand, while older people may prefer the ease of access that a ground floor apartment provides, young singles might not be willing to swap a balcony for a courtyard.

Renovation regulations: By-laws that restrict the amount you can modify a property are another drawback – especially for money savvy future buyers. Australian buyers are increasingly looking for ways to save/make money and if improvements like installing solar power or new flooring aren’t easy to implement many will move on to the next option.

 

3. Apartments Don’t Fare Well in Downturns

Some argue that apartments are a better investment than houses in the suburbs because people will always want to live closer to the city. Therefore, apartments will always rent out easily.

However, with developers building so many apartments, the inner-city market can easily be tipped into oversupply.

Apartment owners are the first to suffer when it comes to housing gluts.

Too many apartments – all of which are probably similar in size and features – means more competition to attract renters, which in turn means lower rental yields. All the while mortgage repayments will remain the same. So you’ll make less money waiting for demand to catch up to supply, instead of saving up for your next buying opportunity.

4. A Small Slice of Valuable Land v a Big Piece of Cheaper Land?

Some economists argue that it is better to own an apartment that sits on highly valuable land than a house which is worth more than the land it is built on.

However, while having a high land-to-asset value ratio may seem appealing, it’s a moot point because, realistically, few apartment owners ever have the opportunity to cash out on that land value.

You’ll most likely have no control over what is done with the land your apartment is built on unless a developer decides to buy out the whole complex. And this simply isn’t going to happen for the multitude of new apartment complexes springing up in CBD areas.

The 8 Big Questions First Home Buyers Are Asking

        1.     What Does a Decent Deposit Look Like?

The first question that pops into every first home buyer’s mind is “how much will I need to save before I can buy?”

While 20% has always been the standard – and is a great goal because it means less money spent on repayments in the long run - nowadays you can borrow more money with a smaller deposit.

Getting a loan for 100% of the purchase price is out of the question, but you can put down as little as 5% of the total price.

However, be aware that you should not be putting all your money into a deposit - it's wise to have a buffer for things that can and will go wrong. And, the smaller your deposit is, the larger risk you are to lenders, which means you will probably be required to get lender's mortgage insurance.

2.      What is Lender’s Mortgage Insurance?

Lender’s mortgage insurance (LMI) is a type of insurance that protects your lender from losing money if you can’t repay your home loan and they have to sell your house at a loss.

The premium for this insurance is passed on to the borrower as a one off fee built into their mortgage or payable upon signing.

How much this fee will be depends on:

• The amount of money you borrow
• What percentage of your mortgage you put down as a deposit. If you have a deposit of 20% or more, you don’t have to pay LMI
• Your personal circumstances – e.g. was your deposit saved over years or was it made up of a large gift or inheritance?

When deciding whether to save for an extra few years to get that deposit or to take on the cost of LMI it’s important to consider:

• Whether rising house prices in the area you want to purchase in will offset the cost of LMI
• Whether you can get a guarantor on your loan, as this may negate the need for LMI
• Whether you work in a profession that is eligible to have the LMI waived (doctor, lawyer, veterinarian, etc.)

3.      What Legal Fees Will I Need to Pay, and to Whom?

While experienced property investors don’t necessarily need to pay an expert to look over their transactions first home buyers should always hire a conveyancer and a lawyer.

Conveyancers (or conveyancing solicitors) specialise in settlement and title transfers, and are there to:

• Make sure that you meet all of your legal requirements during the transfer of ownership
•  Protect your rights

In addition to a conveyancer, you should also get a lawyer to give your contracts a good once over.

In total, budget for up to $3000 in legal fees, provided your purchase doesn’t have any special requirements or extenuating circumstances.

4.     Stamp Duty: What Is It & Do I Have to Pay It?

They say that only death and taxes are certain in this world, and the realm of property investment is no exception to the rule.

Stamp duty is a state government tax on the transfer of land or property.

Fortunately, if you’re a first home buyer who is planning on occupying the home you purchase, you’ll get some nice tax breaks which could whittle the stamp duty you need to pay down to almost nothing (depending on which state you buy in).

To see how much stamp duty you’re likely to pay on your first home purchase, just use an online stamp duty calculator to see your state’s rules.

5.      What First Home Owner Grants & Incentives Can I Get?

On the 1^st of July 2000, the Australian Government introduced the First Home Owner Grant Scheme.

The purpose of this scheme was to offset the effect that the newly introduced GST had on first-time buyers and to provide more opportunity for them to get on the first rung of the property ladder.

Each state has different offers and requirements. Some put a cap on the total purchase price of a first home, others only provide the grant to those building new homes, and others simply offset the cost of stamp duty.

To find out which incentives apply to your state of purchase, click here.

6.      Do I Need to Pay for A Mortgage Broker?

For many people, finding and applying for their first mortgage will be the most thorough and mentally trying process they’ll ever have to tackle.

Fortunately, you don’t have to approach every single lender to find the best deal. A mortgage broker can help you:

• Work out the size and type of the mortgage you should apply for by asking you a few questions about your circumstances.
• Begin your application by launching a full-scale fact-finding mission. During this stage, you’ll need to provide evidence of your income/expenditure, but by the end of it, you can rest assured knowing you’ll be filling out the paperwork for the product that’s right for you.

And, the best thing is, mortgage brokers charge the banks, not the buyer.

7.      Does Capital Gains Tax Apply to First Time Owner Occupiers?

Capital gains tax is charged on the money you make when you sell an investment asset.

Fortunately for first home buyers who are also owner occupiers, CGT does not apply to houses that you live in.

So, unless you’re planning on making your first purchase an investment property, you won’t have to worry about capital gains tax.

If you are planning on buying an investment property, make sure you’ve done the math and weighed rental yields, capital gains and available grants against tax incursions and upkeep expenses before you sign on the dotted line.

8.      What about Home Insurance? Is it Mandatory?

Australia is a land that is prone to flooding, bush fires, drought and hail, which is why mortgage brokers and banks insist on home buyers also purchasing some form of home and contents insurance.

However, that doesn’t mean you have to settle for the insurer recommended by your mortgage broker or bank.

Shop around for a policy that offers you the best value in terms of cost v coverage. You need insurance that covers your home for a wide range of disasters. Don’t get caught underinsured because you opted for the cheapest policy.