Property Investing Risks and How to Mitigate them

Before investing in property, most people have a long list of ‘but what if’ questions – and fair enough, too, because no investment is without risks.  

We think it’s important to call the risks out upfront, because then you can work through the options for how to manage or mitigate them. 

So here we discuss seven of the potential risks, and how you can plan to deal with them. 

But what if? #1: I can’t get tenants?  

When you’re doing your due diligence on your property, it’s important to carefully consider the area you’re buying in, and the market rent for that type of property. You want to buy in an area where the population is growing and there are employment opportunities, as that feeds into rental demand. You should get a couple of rental appraisals to ensure the numbers you’re relying on are realistic, not optimistic. 

In our experience, the risk is not that you can’t get tenants at all, but that you can’t get tenants at that level of rent. Therefore, the risk isn’t having zero income, it’s having slightly less than you’d hoped for, for a period of 12 months (because the rent can only be revised annually). Usually, by making a small adjustment in your own personal spending you can offset the difference and review the rent in a year to ensure it’s in line with the market. 

Some developers offer a rental guarantee for a period of time, and while there are always Ts and Cs, if your property is in a subdivision where there may be many properties all becoming available at once, it can help offer some security for that period of time.  

But what if? #2: Tenants damage my investment property? 

Property has a distinct advantage over many other investment types - you can insure it! It’s important that your property is appropriately insured, usually with a ‘landlord’ policy. You also need to ensure that you’re holding up your end of the bargain to make sure that policy remains valid, for example conducting regular inspections. That’s where having a property manager can be useful, as they follow a regular schedule and take photos to record any damage. A property manager also vets prospective tenants, to reduce the risk that you’ll end up with wilfully destructive tenants. 

But what if? #3 My situation changes? 

One of the biggest risks to making money out of property is having to sell at an inopportune time. That’s why you need to not only run your numbers (rent, yield, top up, interest rates etc) prior to buying, but continue to focus on improving your personal situation, to help reduce the risk that unforeseen events impact your ability to own the property. In addition, you should also aim to have a ‘buffer’ of available funds in your revolving credit that factors in, at a minimum, two years of ‘topping up’ the property (the top up is the difference between property’s costs and the rent). You should also review your personal insurances when you purchase a property, and potentially look at increasing your trauma and life insurance policies to include servicing the property. Then, in a situation where you had to go down to one income (or if you’re single, your income is wiped out) due to ill health, you can afford to continue to own the property and sell it when the time is right for you.  

But what if? #4 Interest rates change? 

As property is a long-term investment, over the time you own it interest rates will inevitably go up and down. When you’re running your numbers before you buy, you need to consider the impact of higher rates, to ‘stress test’ your situation. Being prepared for higher interest rates is another reason why you should have an available buffer in your revolving credit, so if the amount you have to contribute to the property increases you have access to additional funds. However, if the cost of servicing the debt rises, say, $30/week, sharpening your own spending can help you offset the difference. Sharpening it by more than the difference can help you to build a bigger buffer to offset any future rate rises, too. 

With an investment property it’s common to structure the debt as interest-only, as that keeps outgoings to a minimum. Fixing your interest rates also helps to offer security over the medium term as to what your top up costs will be, so you can plan for it.  

But what if? #5 The property needs major repairs? 

The biggest factor that can mitigate the need for major repairs is to buy a new build property. When the property is new, the big stuff - like the roof for example - can be expected to remain in good condition in the timeframe you’re likely to own it. Plus, we recommend you buy a property with a Master Build (or similar) guarantee, so if there was a defect with the roof within the first 10 years, that guarantee would cover its repair or replacement.  Insurance is also crucial here. 

But what if? #6 The government changes the rules? 

It’s been known to happen! Not all rule changes will directly affect your ability to own the property, for example whether the ‘bright line’ capital gains tax period is 2, 5, or 10 won’t change your cashflow. But some changes – like the interest deductibility changes introduced several years ago (and since unwound) – do. This again highlights the importance of continuing to pay down personal debt, strengthening your personal financial situation, and having a buffer available, so you can withstand changes in the cost of owning your property.  

But what if? #7 There is a fall in the value of my property?  

Fluctuations in property prices are normal but sudden drops in value can cause concern for investors. 

If the value falls after you have purchased and financed the property, the potential impacts can be mitigated by holding on to the property and selling at a point in time that prices have risen again.  Investors that are ‘in it for the long term’ have little to fear here.   

If you buy off plan and the value falls before settlement, there are additional risks attached to the financing of the property.  The Loan-To-Value Ratio (LVR) will be lower, and you may not be able to borrow as much as you had planned. 

For help with mitigating these risks, speak to a mortgage adviser and/or an enable.me coach.  An enable.me coach can help you choose the best finance options for your situation and ensure you have a financial cushion, should you need it. 

 Disclaimer: This blog is for informational purposes only and does not constitute individual financial advice.