Investing of any kind does not come without risk. Although generally residential property is one of the most conservative investment classes out there, it is still important that you appreciate what you may potentially be up against as you build your portfolio.
The main risks we deal with on a daily basis are:
1. Gearing Risk – This relates to the level of debt (leverage) that you have taken on in order to acquire and hence control a particular property and also withstand interest rate increases. Debt is necessary and is not a bad thing provided it is productive in nature and responsibly used to build an income-producing asset base.
2. Value Risk – This relates to fluctuations in market values that follow distinct economic cycles. Simply knowing that cycles occur isn’t enough. You need to be swept up with why cycles occur and the signs that things may be about to change. The value of any given property essentially becomes a factor of its underlying demand and desirability and of course the availability of credit. Public infrastructure spend, private business/commercial investment and increasing population within your market are necessary pillars for value growth.
3. Tenancy Risk – It goes without saying that there are some unfavourable tenants out there. This risk is managed by ensuring you have adequate building and landlords insurances in place. Professional property management cannot be overstated. Be warned though that not all property managers are created equal.
4. Liquidity Risk – This relates to your ability to keep your ‘head above water’ should an unforeseen event occur which affects cashflow. This could range from an expensive hot-water repair to an extended vacancy beyond your control. A liquidity buffer such as a Line-of credit facility or genuine savings combined with adequate income-protection insurances should be discussed with a suitably qualified professional.
5. Legislative Risk – Not really one we can control directly. Things such as abolishing negative gearing or a sudden increase in zoning density in your market can have adverse affects. It’s therefore important you remain aware of what conversations the government is having and potential impact on your portfolio. (Food for thought – Australia’s federal political class collectively own/control an estimated $300 million in Australian property. Source: Australia: Boom to Bust Blog)
Building a well-performing portfolio that is structured correctly for finance, taxation, asset protection and legacy/lineage is the objective if you want to get ahead. Property is definitely not ‘get-rich-quick.’ Slow and steady wins the race.
If you’ve ever considered investing in property, now is as good a time as any to get proactive!
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