The thing with investing, is that all of it carries some level of risk.
It’s like that saying “no risk, no reward” right? And property investment is no different.
But risk doesn’t necessarily have to be scary, and the key to successful investing isn’t in avoiding risk all together (in fact, it’s not possible to do so).
The actual key? Understanding the risks, and equipping yourself with the strategies to manage it.
So here’s a breakdown of the most common property investment risks, and what you can do to minimise them along your journey:
- Market risk:
We know that the market is dynamic and constantly changing – in fact, it often moves in cycles. These cycles are usually influenced by interest rates, economic conditions, government policies or supply and demand, and can mean that over time we will see periods of growth, periods of stability and downturns.
As we move through different periods, property prices rise and fall, impacting the value of your investment.
How to minimise it: Invest for the LONG TERM. While property value may fluctuate in the short term, if you wait it out long enough – well-located properties in high-growth areas tend to appreciate in value. Understanding where the market is in its cycle can also help you make smarter investment decisions.
- Liquidity risk:
When we talk about the ’liquidity’ of an asset, we’re talking about how easily you can turn than asset into cash without affecting its price too much. When you think about investments like stocks – which can be sold instantly, you can see how real estate is seen as a liquidity risk. Sometimes it takes weeks, months, even years to sell a property depending on the market conditions, and this could potentially put you in a tough position.
How to minimise it: Keep a financial buffer or emergency fund in case you need to hold the property longer than expected. This will help you cover any mortgage payments or expenses while you wait for the right time to sell.
- Interest rate risk:
Your mortgage repayments are directly affected by interest rates. If interest rates go up, the costs of borrowing increase and monthly repayments on a variable-rate loan go up. This can put a serious strain on the cash in your pocket, reducing your disposable income and impacting your lifestyle.
How to minimise it: Locking in to a fixed-rate loan means you have stability in your repayments, and you’ll be protected against any sudden increases as interest rates shift. You may also want to add a slight buffer with your budgeting. Assume the rates are 1-2% higher than your current rate, so that if they DO increase you’re not left high and dry.
- Buying the wrong property:
Here’s the thing: Not every property is a good investment.
There are factors that need to be considered for your investment to be worth the risk, and if you’re buying in low-growth locations with poor rental demand – it’s likely you’ll experience years of slow (or no) growth, or even vacancies leaving you with no income.
How to minimise it: DO YOUR RESEARCH! Make sure you’re looking at market trends, demographics and vacancy rates before making the big decision to purchase. It’s often worth working with an expert like a buyer’s agent or property strategist who know how to make informed decisions like this, and can help you avoid buying the wrong property.
- Cash-flow risk:
The reality of the rental market means that even the best-of-the-best investments can have periods where cash-flow may be tight. Perhaps a tenant moves out without warning or you have a sudden lifestyle change that alters your financial position. Maybe your property ends up having a ton of maintenance costs or you struggle to fill a rental vacancy once a previous tenant leave.
Whatever the reason – sometimes you just don’t have enough cash flowing through your investment to support your financial position, and that can be incredibly stressful.
How to minimise it: Keep an emergency fund with at least 3-6 months of mortgage repayments, in case you need to dip in and cover expenses. Looking into landlord insurance can also ensure you’re protected against loss of rental income or any damages to the property from the tenant.
No matter what you’re investing in – there’s going to be risks involved, it’s just how the cookie crumbles.
But if you’re smart, you won’t let the risks hold you back.
Prior preparation prevents poor performance, right? So planning, preparing and knowing how to protect yourselves against these potential risks is the best way to move forward with your investments and keep you confident and ready, even if something does go wrong.
Working with a team like InvestHer can help you determine which risks are most relevant to your unique situation, while equipping you with the tools and advice to minimise them. If you want to find out more about how we at InvestHer can help you along your investment journey, contact us and let’s chat!
Investing may have its risks, but we’re willing to support you through them.
