All investment strategies come with their own set of risks and benefits that must be weighed up before diving right in.
Investing in property is no different.
While it can appear as if the benefits largely outweigh the property risk in Australia, the reality is that the dangers of investing are still ever-present.
This means it’s important to ensure that you’re always aware of these real estate investment risks so you can take appropriate action to minimise them as much as possible, especially if you’re prone to risk aversion when it comes to investment.
To help you identify these potential threats to your property portfolio and implement the right risk mitigation strategies, we’ve put together this helpful article outlining all the most common property investment risks to be aware of.
Whether you’re a first-time investor or a seasoned pro, the best thing you can do to protect yourself, your property and your financial future is to be prepared.
Table of Contents
- Vacancy periods
- Risk mitigation strategy
- Difficult or destructive tenants
- Risk mitigation strategy
- Unforeseen expenses
- Risk mitigation strategy
- Interest rate hikes
- Risk mitigation strategy
- Tight cash flow
- Risk mitigation strategy
- Personal injury or loss of income
- Risk mitigation strategy
- Do you need help with integrating risk mitigation strategies into your investment property portfolio?
1.Vacancy periods
At one point or another as a property investor, you will experience a vacancy period of a couple of weeks or more. This is a normal, albeit frustrating part of your real estate journey.
Whether it’s struggling to find new tenants at the end of a lease, a tenant who’s chosen to break their lease, or something else influencing the property investment market altogether, the best thing you can do is to be prepared.
Risk mitigation strategy
Most smart property investors build cash buffer’s large enough to continue covering their mortgage and other property expenses during periods of vacancy.
Of course, the size of your individual cash buffer will depend on your own risk tolerance. Seasoned investors typically like to keep at least 3 months’ worth of expenses on hand to cover vacancy periods.
2.Difficult or destructive tenants
Every property investor dreams of having the perfect tenants, but unfortunately, that’s not always the case.
While you can vet your tenants before they move in, there is always the risk that they may prove difficult down the line – whether it’s refusing to pay rent, damaging your property or something similar.
Risk mitigation strategy
Experienced property investors always make sure they have landlords insurance to cover themselves in any event that their tenants become difficult or unruly.
That way, if they do have to repair damage to their property or take action against their tenants, they won’t take a long-term financial hit.
3.Unforeseen expenses
When investing in property, most expenses are reliably predictable, from your mortgage repayments to council rates, utilities and the like.
However, the risk to investment comes from those unforeseen expenses that can arise from unpredictable scenarios, such as fire or storm damage.
Risk mitigation strategy
Again, the most common risk management strategy for property investors in these situations is ensuring the right building insurance policy is in place to cover any unforeseen expenses that may impact their property.
If (for example) a storm or natural disaster does hit, they then have confidence that they’ll have the funds to repair their property and get their tenants back in as soon as possible.
4.Interest rate hikes
Rising interest rates have proven a significant property investment risk of late. In less than two years, we’ve seen rates climb from as little as 2% to more than 6%, adding hundreds of dollars to monthly mortgage repayments for every property investor.
While this has been an alarming time for many, it does appear as if interest rates have stabilised for now, and it’s widely predicted that they will begin to come down again in the next 12-18 months.
But it’s still best to be prepared for anything.
Risk mitigation strategy
Just as with vacancy periods, smart property investors believe the best risk aversion strategy when it comes to interest rate hikes and increased mortgage repayments is to build a cash buffer.
Ideally, this cash buffer is enough that they can continue to feel comfortable with their repayments regardless of where interest rates are at. Again, the right amount for you will come down to your level of risk tolerance.
5.Tight cash flow
Even the most prepared property investor can experience a tight cash flow risk at one point or another.
Whether it may be related to your property or due to external circumstances beyond your control, cash flow risk can cause a lot of stress and frustration, but it doesn’t have to be that way.
Risk mitigation strategy
While this may sound repetitive, most investors agree that a cash buffer is the absolute best way to ensure the minimisation of risk in investment and protect themselves against periods of tight cash flow.
In doing so, they can make sure that they have enough cash on hand to tide them over and continue meeting their financial obligations with their property until they can get back to normal.
6.Personal injury or loss of income
It’s often easy to forget that sometimes, things do happen that we never thought would happen to us.
Whether it’s losing your job, suffering an injury that prevents you from working, or getting sick, you want to ensure you have a risk management strategy in place so you can still meet your financial commitments as a property investor throughout this period – until you can get back on your feet.
Risk mitigation strategy
Again, this one comes down to having the right personal injury and income insurance.
Smart investors ensure they have a solid insurance policy in place that they can rely on to back them up if something unexpected happens to them.
In doing so, they greatly minimise the risk to their property portfolio and ensure they can continue their journey towards financial freedom once everything is back to normal.
Do you need help with integrating risk mitigation strategies into your investment property portfolio?
At inSynergy, our expert team is here to help you.
inSynergy is a full-service and specialist Property Investment Advisory firm dedicated to helping you learn how to use property investment and finance as a tool to build a more secure future.
We provide our clients with a broad range of professional services designed to assist with all aspects of property investment, including property investment education, property investment strategy, finance and mortgage broking, and sourcing high-growth investment properties.
Through every interaction with you, our focus is on helping you to safely build a successful property portfolio and achieve your financial goals without sacrificing your lifestyle.
Get in touch with us today to discover how inSynergy can help you on your investment journey.
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Please note, that this article and the information in it is general and not to be considered as financial advice. However, you can book a meeting with us for personalised advice tailored specifically to you.