Richard Sheppard is the Managing Director of inSynergy Property Wealth Advisory.
Minimising your property investment risks
In the past few editions of Peninsula living, we have examined three of the six steps to property investment success: education, research and strategy. This month, we take a look at the fourth step to successful property investment: risk management.
Successful risk management of an investment property should cover both the safety aspects of property investment (including negative capital growth, tenant damage and increased interested rates) and the most overlooked aspect of risk management – lost opportunity.
Property in Australia is considered a low risk yet strong investment. In fact, ANZ Economics rates it as “vastly superior to all other broad asset classes in risk adjusted terms”*. Though, as with everything, there are still real risks and you should be prepared. Generally speaking, higher returns mean higher risk, but can you increase your returns without increasing your risk?
In property, we strongly believe you can. By applying intelligent and well planned research, strategies and risk management techniques, you can give yourself the best chance of buying the right amount of quality property in high growth areas with low relative risk. Let’s look at the main risks of property investment and how to minimise them.
Negative or poor capital growth
While property should be treated as a long-term investment, missing short and medium term growth can be one of the biggest risks of property investment. Short to medium term growth can provide the perfect equity for your next investment.
The best way to lessen your chances of negative or poor capital growth in the short to medium term is through market research. We recommend getting advice from a professional property investment advisor or property investment buyer’s agent.
They have access to the most current information available including high growth areas and investment and infrastructure plans. They also understand the importance of proximity to schools, shopping centres, and transport. All these are important when determining market value and growth opportunities.
Property damage by tenant
While general insurance can cover for damage to property through fire, theft or natural disaster, you will require separate landlord insurance to cover costs associated with damage caused by a tenant. Landlord insurance is tax deductible so talk to your advisor, read the product disclosure statement available and understand what it covers.
Increasing interest rates
It can be tempting to choose fixed interest rates to counter the fear and possibility of higher interest rates. But often, all fixed rates do is cost you more for the privilege of reducing perceived risk and fear.
There are other techniques you should consider alongside fixed interest rates such as choosing interest-only loans, making extra payments and building a buffer of cash or other liquid investment reserves.
Lost rental income
While landlord insurance can cover lost rent due to tenant damage, it generally does not cover lost rent due to market conditions. Currently, market vacancy rates are at an all time low. Regardless, it is good practice to keep a month’s rent up your sleeve to cover the possibility of lost rental income.
To minimise the risk of longer vacancy, buy in high demand areas or even consider keeping a credit card, with a modest limit, hidden away from easy reach.
Loss of personal income
Your ability to earn income is one of the most underinsured assets Australians have. Loss of personal income represents one of the biggest risks to property investment (not to mention your financial future) so please talk to a licensed financial planner or insurance broker about this important issue.
For more advice on risk management for property investments, we recommend you contact your property investment advisor. For more information, or to view any of our previous articles, please visit www.insynergy.net.au