Top 7 risks of investing in property
There are some fantastic returns to be achieved through property investing, but there are also risks which need to be understood before starting your investment journey. As with most risks, many can be mitigated, but managing your risk is an important element of any investment strategy. We cover some of the risks associated with property investing below.
- Lack of knowledge. We are all human and we are all prone to making mistakes, but mistakes through lack of knowledge associated with property can be costly. It is important that you spend enough time on your property education, as this will help you to become more efficient, and avoid making ‘common’ mistakes. With knowledge comes confidence and this saves time, money and stress. Investing in your property education will be the gift that keeps on giving for your future investments – and will significantly increase your enjoyment of investing and perhaps more importantly the financial returns you achieve as a result!
- No plan / strategy. Not having a plan can lead to poorer performing investment decisions, which could reduce your financial returns compared to having a clearly defined goals, and a detailed plan to achieve them. How do you know which properties and areas are right for you if you don’t know what you are trying to achieve? Take the time to plan out your goals and identify the necessary steps for success.
- Listening to others. The thing that we hear most often from people yet to start property investing is that they have heard ‘bad things’ about property investing. “One of their friends had a friend who had their property trashed, or who lost money investing” and has proceeded to tell everyone they have ever met that “property is a bad investment.”
Well, the reality is that the person telling you this probably puts their money in an ISA and gets 1% return (devaluing capital each year) on their hard-earned savings. The person who lost money property investing probably didn’t seek support, made a lot of mistakes and didn’t take the time to increase their own property education. This is just life and we (mostly) all live with a negative bias. For example, as a rule people only review products online that did not live up to expectations.
Don’t be put off by other people’s comments, do your own research, seek your own guidance/ advice and make your own informed decisions. There is a reason why most financially successful individuals have property at the heart of their investment portfolios.
- A property market crash. This is one of the things that concerns potential property investors, in the same way it concerns stock investors. People are fearful after a market crash (regardless of what the market is), confidence is lost and the ironic thing is that this is actually the time to buy! Buy when others are fearful, and don’t buy when others are confident (usually the market is high at this point) – this is what most, experienced investors do.
With property, the market works in approx. 18-year cycles, and knowing what stage of the cycle we are at is essential to successful investing. Very few can predict to the day, week or month when the market will peak, but there are signs, and having the understanding of when to buy, and not to buy is important. However, experienced investors ensure that they are buying below market value (BMV) and ensure any investment ‘stacks up’ and is likely to remain a sound investment for the long term regardless of what point the market cycle is at – these are mitigators.
Most people invest in property for the long term and so are happy to ride out drops in the market, with the knowledge that by the end of the cycle, house prices will be higher than they were at the end of the prior cycle. This has been the case since 1952, when Nationwide started tracking house price data. Being aware of the market and having confidence that your investment is a sound one is important no matter what stage of the market. If you are unsure then it is always best to seek advice, as mistakes can be costly, and remember, you only lose money when you sell!
- Void periods. The three most common reasons for frequent void periods (the time gap between a tenant moving out, and the next tenant moving in) are: i) You have bought the wrong kind of property for the area (local market) and the tenant demand is not there. ii) The property’s rental price is set too high for the condition of the property and the market. iii) The property is in a poor state of repair, and potential tenants do not want to live there.
There are obviously many other potential factors too, but these are the most common from our experience. All three are within your control though and making sure you research the best property to buy (to achieve your personal goals) in the area you choose is vital. Not being too greedy and ensuring you maintain the property to a good state of repair is also important. Tenants love landlords who get maintenance issues resolved quickly and feedback we have received is that good landlords are as hard to find as good tenants, so keeping hold of your good tenants is important.
Remember, look after your tenants, and they will usually look after your property (and your mortgage payments). It is always best to ‘zoom out’ and look at the bigger picture in the context of your strategy, and not get caught up in short term temptations of greed.
- Unexpected maintenance. This can be harder to predict but ensuring that you keep on top of your property’s overall condition is important. It is more economical to keep your property in a good state of repair in the long term. Before buying the property, ensure you get a good survey and factor in things like the roof condition, the age of the boiler (older = more unreliable, as a rule, and therefore more expensive) and the condition of the bathroom / kitchen. Boiler breakdowns and leaking bathrooms are common issues, so getting these checked is important.
You should allocate 10% of your rental income each month to maintenance, as a rule of thumb. This should cover tradesmen costs for any minor issues that occur, or you may have no issues, then the boiler requires replacing out of nowhere. Allowing this 10% per month should help take the sting out of maintenance costs, but attack (being pro-active in getting maintenance done) is the best form of defence (having no issues) in this instance.
- A vandalised/ trashed property. This is very rare, with most tenants being genuine and respectful. There are a couple of things you can do to mitigate the risk of this happening (although it is impossible to completely eradicate the risk, as people are people at the end of the day). The first is buying the right property in the right area, and pre-selecting your ideal tenant group. Whilst this doesn’t rule out the risk of vandalism, it does help to reduce the chances of this happening somewhat. Good background checks on tenants helps to get references from prior landlords, and credit checks etc. so you can make more informed choices regarding your tenants.
The second mitigator to protect your investment is to make sure you have good, thorough insurance with a reputable insurer who covers acts of vandalism. Obviously, this doesn’t stop vandalism happening (not possible), but it does provide peace of mind, in terms of mitigating the financial impact if it does happen.
As we have touched upon, there are mitigations to most of these risks, and whilst the mitigations may not stop ‘bad things’ happening, they do limit the financial impact to your investment should they happen to you.
The biggest risk, in our opinion, is doing nothing and choosing not to invest. Not investing your money in assets that pay healthy returns will lead to erosion of your financial security. Being cautious in making investment decisions is a good thing, but don’t let the ‘fear of risk’ lead you to do nothing. Take the time to learn about different investment strategies, which is right for you, and seek support if needed to increase your confidence, but make sure to take the first step…your bank account will thank you later.