Recent figures suggest more people are turning to property as a way to make their money work for them; in March this year, according to the ABS, lending for investor housing rose 2.9% to a record high of $11.7b.

Furthermore, new loan commitments for investor housing rose 5.7% and was 25.0% higher compared to a year ago.

However, all forms of investments have a risk, and the secret to every good investment is how to minimise that risk.

Here are some real estate risks, and some tips on how you might be able to minimise them.

General market risks

Whether it’s investing in stocks and shares, or precious metals, all markets face ups and downs and real estate is no different.

No, you can’t protect yourself from outside indicators, such as downturns in the economy, but it is important to remember property is a long-term investment.

Know your strategy and do your research to know what makes a good investment property, in terms of location, facilities, and vacancy rates. And always budget for other costs, like maintenance.

When you are in a position to do so, diversify your investment portfolio, either with different types of properties/properties in different locations, or potentially look at other forms of investment.

Liquidity (or how quickly can you access your money) risk

Liquidity refers to how easily you can gain access to the money you have within an investment.

Compared to some other forms of investment, real estate doesn’t offer an immediate access to funds, so the investor really does need to understand their own personal financial situation, and plan for a long-term investment.

Also look to purchasing a property where demand is high, that way you’re less likely to suffer a loss if you have to sell at short notice.

The risk of interest rates rising

Obviously if the interest rate rises and you have a mortgage, then your mortgage payments will increase.

To reduce this risk, investors should budget to ensure the rental income more than covers the outgoing costs, and you can consider fixed-rate mortgage options.

Mortgage lenders usually won’t lend you the money unless you can afford potential increases in rates, but also budget for times the property maybe empty and not earning an income.

The impact of inflation

The Reserve Bank of Australia defines inflation as an increase in the level of prices of the goods and services that households buy. It is measured as the rate of change of those prices. Typically, prices rise over time, but prices can also fall (a situation called deflation).

The good news for property investors is that well-located properties is recognised as a highly effective inflation hedge over time.

To mitigate this risk, buy in areas where there are factors driving growth, such as jobs and good infrastructure.

The risk of damage by natural and accidental causes

Australia is a country where there are bushfires and floods, and properties can get damaged by storms, falling trees and other natural events.

The most obvious mitigation for this risk is to buy in an area where there is a minimal risk to natural disasters. While there is little you can do against natural weather events, you can insure your property, so at least you’re out of pocket costs will be minimal.

When it comes to other forms of damage, such as tenants accidentally damaging your property, or defaulting on the rent, a good landlords’ insurance will some protection for tenant-related loss and damage.

Also keep on top of maintenance, such as repairing gutters and checking for pests. This will reduce the risk of something little morphing into a bigger, and more expensive issue to put right later down the track. We regularly check up on our properties to ensure they are properly maintained and being cared for by the tenant.

Bad Tenants

While you may not think it matters who you rent your property to, bad tenants can cost you both in terms of money and time. And if you have to evict them, the process can be lengthy and expensive.

Using a property manager to screen tenants, and properly manage them will reduce the risk associated with bad tenants. A basic tenant screening process involves getting references from previous landlords and performing credit checks, but we do more screening to ensure the tenants we place in the properties we manage are responsible renters.

Furthermore, we have good professional relationships with our tenants to prevent a potential negative situation escalating into a crisis.

Risk to yourself

We never know what’s round the next corner, so we do need to prepare for the unexpected such as illness, or a change in financial situation.

To give you peace of mind you should the unexpected happen, there are insurances you can take out to protect your mortgage.

And once you’ve bought your investment property, get in touch with us to see how our property management services can make your life easier and free you up to do more of the things you want to do.

We’ve helped thousands of people realise their financial dreams through property.

Simply give us a ring on 02 4956 9777, send us an email to mail@newcastlepropertymanagement.com.au or pop into our Cardiff office for a chat.

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