What are the Main Risks with Property Investment in Australia?
Property investment is widely considered to be one of the safest investments you can make. Still, as with any investment, there are associated risks, and you should be aware of them before parting with your hard-earned money. Take a look at some of the associated risks listed below to see if property investment is the right investment strategy for you.
When you choose to place your money into investment strategies, there is always a risk. Your money is being held somewhere that you have little control over, and you have no way of affecting outside factors like market prices or global events (such as COVID-19). However, a well-researched investment can and does bring many Australians a passive income to help them on their way to financial freedom.
Even with property, there’s always a chance that the market could dip. Or that the area you bought the house in loses value due to unforeseeable circumstances like infrastructure or demographic changes.
By diversifying your investment portfolio, you can decrease your chances of loss by purchasing your investment properties in different areas or even other states. If your budget does not stretch to more than one house, you might consider buying more minor properties, such as apartments, or investing in shared property investments so that all your bricks aren’t invested in the one dwelling.
One disadvantage of real estate investments is the lack of liquidity compared to other types of investments. If you find yourself in need of fast cash, it can be challenging to gain access to funds by selling property – it’s never a speedy venture. You also risk needing to sell this significant investment at the wrong time; perhaps the market has dipped short term, or you are just unlucky and can’t find a buyer.
The only way to mitigate this risk is to invest in properties that are high in demand, meaning you can almost guarantee yourself a buyer should you need to sell in a hurry.
Loss of income
It’s not a situation we like to consider, but there is a possibility that you could lose your job and be unable to meet the mortgage repayment requirements.
Interest rate risk
You could end up losing capital gains to interest rates. If yours is variable and the interest rates skyrocket, a significant portion of your returns will be lost to this cost. Your only safeguard here is to secure a fixed rate – you’ll lose out if the rates drop, but you won’t end up paying more than what you already signed up for.
Cost of investing
It’s expensive to buy and sell a property. Compared to other investments, you need to spend a lot of money getting into and out of property investment. The cost of buying or selling property can run into the tens of thousands when you consider you have to cover expenses such as:
- Agent fees;
- Marketing fees;
- Property conveyancing fees;
- Property repairs – whether you are buying or selling, properties generally need repairs and the end of each process; and
- Discharge of mortgage and fixed loan break costs.
While you’re probably excited to get the process started, it’s essential to understand what kinds of costs you will be liable to pay for purchasing or selling a property. Without carefully balancing the charges before the sale, you could end up selling at a less than optimal time and end up right back where you started.
Before you jump into selling off your investment property, take the time to carefully consider whether you will be making a profit or whether it might be worth waiting a year or two for market conditions to improve. It’s advisable to hire a property conveyancer to guide you through any transfer of property ownership, such as property investment. If you are thinking of buying or selling an investment property, call Jim’s Property Conveyancing today on 13 15 46 for an obligation-free chat about your needs.
The income from your investment is hinged almost entirely on someone paying to use your property – whether a commercial property or a home. One risk of owning an investment property is that the property will be left vacant for a time, leaving you without an income to cover the costs of ownership such as bills, rates and repairs. With no tenants to pay the rent, this leaves you to pay the mortgage repayments without the extra income from rent.
A vacancy can occur:
- When there is not enough rental demand in the area;
- If your property is somehow damaged and needs to be empty to undergo repairs; or
- Simply because your property manager can’t find a suitable tenant.
By researching the area, you buy your property in to ensure there is enough demand for rental properties, you can help alleviate this risk. You would also be wise to set aside some savings to cover a few months of vacancy – just in case.
If the government makes changes to laws regarding investments or property sales, your investment could potentially be affected. Governments change rules from time to time, and sadly you could be negatively affected by changes to the legislature. At the moment, the biggest concern with property investors is that the Australian Government will phase out the negative gearing tax laws, meaning investors will end up paying far more in tax than in the past. Sadly, there is no way you can safeguard your investment against this risk – we just don’t know when or if changes will be made.
Damage to the property
Unlike stocks or shares, a property is a physical asset and is therefore vulnerable to damage. If anything happens to impair or destroy the property, you will most likely be liable to pay for the repairs. Think:
- A natural disaster such as flooding, bushfire, earthquake or wind damage;
- Electrical fires caused by faulty wiring;
- Obscure accidents such as a car crashing into the property; or
- Robbery or vandalism.
Unless the tenant is specifically at fault, the repair costs are going to be your responsibility. Thankfully, it is possible to protect your investment with an all-encompassing insurance policy. Even if you never need to make a claim, you can feel secure knowing your investment is protected in case of emergency – and you won’t have to find thousands of dollars to cover immediate costs.
Debt gearing is something to consider very carefully when balancing the risks associated with real estate investments. Debt gearing is the difference between the debts owed on a property investment and the equity (the value in your property, less what you owe the bank) within the investment.
The purchase price and borrowing amount determine the debt-to-equity ratio; the more extensive the range between what is owed on the property and what it’s worth, the better – this lowers your risks.
You can alleviate this risk by being careful not to over-borrow on your loan for more than you can handle.
Before signing off on a property sale, make sure that you understand your legal rights and responsibilities. Having an expert property conveyancer on your team who can review or draft the licence agreement for you is crucial. For expert advice on property conveyancing services in Australia, don’t hesitate to get in touch with our friendly and experienced staff on 13 15 46.