Investing in property is one of the key methods Australians use to get ahead financially and secure a financially independent future. However, when it comes to protecting their real estate investments many investors, whether new or experienced, are completely unprepared for some of the risks that can come with investing in real estate.
Here, are some of the major risks you might face as a real estate investor and some of the steps you can take to protect yourself and your property.
#1 – Having Your Assets Taken from You
It is a sad reality that Australia is increasingly following the path set by America and becoming a litigious society. There are many reports of accidents happening and courts holding people liable for personal damages in the millions of dollars. You may have worked several jobs so you could afford the deposit on your property investments, so, you definitely don’t want to leave yourself open to being stripped of your hard-won property.
There are specialised insurance products and services available which can help cover costs in these circumstances. Many of these come with expensive premiums, which although less costly than trying to deal with the total amount of any claim against you, still may be unaffordable. This doesn’t mean you should do nothing. By keeping the property you control in the name of other legal entities, such as trusts, for example, you can shield yourself against dispossession as well as legally minimising your taxable income. A good accountant and property law professional can help you set-up the right kind of protective structure.
#2 – Damage to Your Property
Sometimes things can go severely wrong and your property and its buildings may end-up damaged. In 2015, for example, the East Coast Low weather system resulted in hundreds of millions of dollars in property damage. Far too many people, it was revealed in the aftermath, were under-insured and left unable to repair damage or needed to find the money to fix their properties.
As a property investor, you need to make sure your property is adequately covered for property damage, no matter how it occurs. If the next storm hits, someone plows their car into a wall, or your tenants turn feral and trash your property, you want to be covered so you can have things repaired promptly. Check you have the right level of Landlord Insurance cover so you are prepared.
#3 – Rising Interest Rates
We have been living in a rare moment in time where historically-low interest rates have been a factor in the investment landscape for almost a decade. Although rising interest rates can be a good sign of a healthy and growing economy, the sting in the tail for property investors is trying to find the extra funds to cover higher interest payments.
There are two ways you can deal with this risk. Firstly, you want to make sure your home loan broker is stress-testing your investment loan before you sign-up. A mortgage stress-test factors-in an assumed interest rate several percentage points higher. If you can still afford to repay a loan at this higher rate you are likely to be prepared well in advance of any rate rise. Secondly, you want to make sure you don’t over-commit yourself by buying a property that is too far out of your mortgage repayment comfort-zone. Work out your budget and stick to it.
#4 – Managing the Property Cycle
There are some people who say that real estate always goes up in value. The truth is a little different. If you are new to investing you need to realise that your property’s probably value will increase over a 10 year time-frame, however, as it does this it will go through a cycle of fluctuating property prices. The property market is like any other market; it will rise, fall, and stay flat at different times throughout the cycle.
Managing this starts with working out what your goals are. Are you a property flipper, where you buy, renovate, and then resell for a profit in a short period of time? Or, perhaps you’re more interested in capital growth than generating income, whereby as soon as your investment property reaches a market value that represents a good-enough profit for your plans, you will sell it and bank the proceeds. In either of these two scenarios you will need to study the property market in significant depth, and ideally seek good advice from property investment professionals who can provide you with advice to help lower your risks.
Your goal, though, may be to develop an income-generating portfolio of real estate assets. In this case, you will hold your properties for a longer period of time. You might see your properties go through all segments of the property cycle, but because you don’t have to sell them to bank a profit in the short-term, you can wait until the optimum time to sell presents itself, which helps to reduce your overall risk.
#5 – Have the Right Team Behind You
As a new property investor, you might be wondering why you need so many different types of professional advice when it comes to your real estate investment. The key difference seasoned property investors understand is that you can leverage professional property advice to achieve better results in a shorter time-frame.
A good mortgage broker or property investment advisor can help you set-up the right financial mechanism to buy your first property and help you grow your portfolio. An experienced property accountant can help you establish the right structure for your assets to assist in build long-term wealth, while also minimising the amount of tax you need to pay. In addition, a property management professional can ensure that your property is well taken care of, the right tenants are selected, and you are maximising the amount of rent you receive.
Doing it all alone is not only a big task, it can also be a costly decision, especially if you can’t guarantee that you can do everything as well as all of the property investment professionals the expert investors use to turbo charge their results.
Risk is something that comes with the territory with any kind of investing. However, by educating yourself and getting the best professional advice you can eliminate and reduce property investing risk so you won’t have to lose any sleep over your property portfolio.
Do you have questions about your own property investment risks? Talk to one of Vision’s experts today and receive the best advice for ensuring your investment success. Call us on 1800 004 663 or contact us.
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