Investment property risks

1. Market risk 

It’s true that over the last thirty years Australian property has gone up in value. CoreLogic looked at data over 30 years up to 2022, and the figures show the national median dwelling value has had an annual growth rate of 6.8%, or 382% in total. 

 

But in the shorter term, there’s been many downswings and market corrections to real estate prices. Market volatility, even on a small scale, can impact house prices from state to state, and between neighbouring suburbs. Buying on the wrong side of the market - when prices are high - can cost you a lot of money. 

Avoid the risk: 

• Real estate prices often move in cycles. Consider following the market for trends before buying an investment property. When investing, try to avoid paying more than the market price for a property to avoid the chance of getting into negative equity – where your house is no longer worth what you bought it for. 
• Think of taking a long-term approach to investing. The longer you can keep a property, the higher the chance it may appreciate over time. 
• If you own more than one investment property, you may think of lowering your risk by diversifying your property portfolio. You may achieve this by buying in different areas and choosing different types of property. 

 

2. Property risk  

Property can be seriously damaged or destroyed by unexpected natural weather events like storms, fire and floods. It can also be wrecked on purpose or accidentally by tenants, or by building contractors working onsite. Any kind of repairs can be expensive and can also lead to your property being empty for some time. 

 

Avoid the risk: 

• Choose the location of your property wisely. It’s a good idea to check if you’re buying in a flood zone or area of high fire danger. Have a plan in place for your property to protect it in the case of a bad weather event. 
• Check you have the right amount of building insurance in place as soon as you sign the contract for the property. As a rule of thumb, your building insurance should be adequate to cover a complete rebuild if the building is destroyed. Check with your lender and an insurance broker about the amount and most appropriate type of insurance cover you need. 
• Consider if landlord insurance is right for you and make sure you’re covered for malicious damage by tenants.  

 

3. Vacancy risk 

Like the property market, the rental market can go through periods of high and low demand. Which means there may be times when it can be harder to find quality tenants and your investment property may sit vacant for several weeks or months. Every day your property is empty it can impact your rental income, cash flow and ability to pay your loan repayments. 

 

Avoid the risk: 

• Think about choosing a property near high demand locations, such as hospitals, schools and growing commercial areas. 
• Look at offering good tenants longer contracts or a reduced rate as an incentive.  
• Consider keeping money aside to make good any shortfall from a vacant property until you find your next tenant. 

 

4. Bad tenant risk 

Having no tenants can be stressful but having tenants who cause damage to your property, pay rent late, or stop paying rent altogether can cost you a lot of money and anxiety. 

 

Avoid the risk:

• A real estate agent or property manager may assist in thoroughly screening potential tenants and collect personal and financial references.  
• Considering six monthly inspections and have condition reports done on the property. You can attend inspections by request. 
• You may choose to take out landlord insurance that covers you for tenants who default on rental payments. 

 

5. Structural and environmental risks 

Buildings can be impacted by local development like new roads and expanding airports. Pests such as termites and environmental risks like erosion, can also wreak havoc.  

 

Avoid the risk: 

 

• Before you buy, think about conducting a search for planned local development that may negatively impact your property. 
• Consider a building inspection before you buy and follow up with pest inspection every year. 
• Do your due diligence if you plan to buy in a coastal or riverine area to see if your potential investment could be impacted by adverse weather events. 

 

6. Overcapitalisation risk 

If you spend too much money on your investment property improving it to the extent that the amount spent outstrips what your property’s worth, you run the risk of never getting that money back and reducing your profits. Especially, if you have to sell it sooner than you had planned. 

 

Avoid the risk: 

• Consider a property that doesn’t need a lot of renovation and is ready to go, in terms of renting it out. 
• Think of a staged approach to improving the property. Upgrade gradually over time. 
• You may wish to avoid spending top dollar on luxury renovations. Rental properties can take a lot of wear and tear – so aim for finishes and appliances that will last and won’t be expensive to replace. 

 

7. Interest rate risk 

As Australian’s have recently experienced, interest rates can rise as well as fall. If you buy a property when interest rates are low and you’re not prepared for steeper mortgage repayments then you could get into mortgage stress and your investment starts to cost, rather than make you money.  

 

Avoid the risk: 

• Consider taking out a fixed rate mortgage or splitting between a variable and fixed rate, so that you have a buffer if interest rates start to climb. 
• Negotiate the best interest rate you can from your lender, or refinance where you can.  

 

8. Lack of liquidity risk 

Unlike other investment classes, for example shares, property isn’t as easy to convert back into cash. If you need to sell an investment property quickly to realise your equity in it, it can take months to sell. Even if it goes fast, average settlement times are six weeks.  

 

Avoid the risk:

• Consider if property is the best type of investment for you, talk to your accountant or financial adviser about your financial plans and if they’re appropriate for your situation. 
• A reserve of cash to tide you over if needed until you sell could be useful. 
• Consider a diversified investment portfolio with assets that have more liquidity. 

 

9. Costs risk 

Buying an investment property can take a sizeable deposit and ongoing upkeep costs such as, gardening, pool maintenance and building repairs, plus rates, insurance, strata fees and land tax and more. 

 

Avoid the risk:

• Consider a budget for ongoing costs before you buy and factor it in ongoing. 
• Speak to your accountant or financial adviser about how best to structure your property from a tax perspective to suit your financial situation.

 

10. Area risk 

Buying cheaper property outside of a city, or in an area that’s not yet up and coming could be a smart move in the long run, especially if there’s signs that the area may improve in the next few years. But if an area goes into decline or is slow to develop, then your asset’s growth may follow. 

 

Avoid the risk:

• Do the research to see if there are indicators that a suburb or town may be about to enjoy positive growth, including new urban development, good access to public transport and a growing population. 
• Check the crime rates for the area.  
• Consider the capital growth for properties in the area over time and see if the market has been slow to appreciate. 

 

If you’ve done all the discovery and factored in all the risks and want to buy an investment property, reach out and talk to us. We love to help!