Understanding the risks of property investment
There are some pros and cons to consider when it comes to investing in property.
For many, the prospect of investing signifies the potential for great returns. This is because property investment can be seen as less risky than other forms of investment.
However, before making a property investment purchase, it’s smart to carefully evaluate the benefits and risks to decide whether or not it will be a viable investment for you. Some of the potential
- Vacancy - There is a risk that you may not always be able to find tenants for your property. In these
instancesyou won’t have this income and will need to cover the costs yourself.
- Tenants - An unfavourable tenant could damage your property and become difficult to evict, which may cause financial loss for repairs and legal advice.
- Loss of value – The property market is subject to market factors which can affect demand, availability and the value of the asset. Therefore the value of your property may depreciate if the market takes a
- Maintenance - There is a risk that repairs and maintenance expenses could become significant.
- Interest rates – A rise in interest rates could impact your ability to afford monthly repayments.
- Unemployment - Your job circumstances could change and if you become unemployed this might affect any negative gearing benefits you may be receiving from the investment.
- Costs - Expenses such as stamp duty, legal fees and real estate agent's fees can
maymake buying and selling property costly.
- Inflexible – Property is not a liquid investment, so therefore it can be difficult to sell the asset quickly if you need to access some cash in a hurry. Savvy investors will take steps to minimise risks, such as diversifying their property portfolio. This may involve investing in different property types across different states of Australia or employing some common strategies to reduce risk, including:
- Savings – An emergency cash fund could help you cover any unforeseen expenses that may arise in the future.
- Split or fixed rate loan – Splitting your loan or opting for a fixed rate loan could provide some certainty around knowing what your repayments will be each month.
- Research – Undertaking research into the market you’re investing in will help you understand the decision you are making and any future plans for the region you are considering investing in, which might affect supply and demand and rental yield.
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- Chapter One : Things to consider before investing in property
- Chapter Two : Determining where to invest
- Chapter Three : Investment properties by dwelling types
- Chapter Four : Finance for your investment property purchase
- Chapter Five : How to invest in property
- Chapter Six : Adding value to your investment property
- Chapter Seven : Positive and negative gearing
- Chapter Eight : Getting your loan
- Chapter Nine : Selling your investment property