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.
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