How to Mitigate the Risks of Property Investing

Despite the fact that property has generated huge amounts of wealth for so many people, there is always some degree of fear when people first look at the prospect of becoming investors.

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No matter what you do, there are always going to be risks when you invest in property, and for some people, that is enough to hold them back and prevent them from ever starting.

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However, it’s also important to realise that by avoiding taking any risks in life, you might just be putting yourself in a position where you end up not having enough for retirement or being someone who struggles financially for your whole working life.

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Fortunately, if you do want to use property to get ahead, there are things that you can do to mitigate the risks so you can get ahead and still sleep well at night.

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Land Component

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One of the easiest ways to ensure you are buying a property that will hold up over time is to focus on purchasing a property with a large land component. Over time, we know that land increases in value, but buildings decrease.

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The more land you have with your property, the safer it’s likely to be as an investment. We often see people who buy off-the-plan apartments run into trouble because they either can’t find tenants or the investment sees no capital growth over a long period of time.

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By focusing on land, you are putting the odds in your favour.

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Established Areas

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If there are already people living in a certain area and we’ve seen a track record of solid growth, then it’s fair to assume that the area will likely hold up over time.

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Investors often take big risks when they chase high yields in places like mining towns or remote areas, when in fact, they would be far better off just looking for solid areas that are already established.

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Supply and Demand

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One of the things that hurt investors is when they buy a property and there is little to no growth for a number of years.

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That’s a situation that can be avoided by finding areas that are currently seeing strong demand and where supply is constrained. This is most obvious by looking at the current level of listings compared to total sales for a suburb.

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If there is high demand (sales) and low supply (listings), that’s a good indication that prices are going to rise in the short term. That will also help give you not only a quick equity buffer but also mitigate some of the risks.

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There is also some degree of vacancy risk and tenant risk when investing in property. So it’s worth ensuring vacancy rates are low in the areas you choose to buy as well.

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Budgeting

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In reality, the main risk factor for most investors is usually themselves. Investors will mostly fall into trouble with their own finances, rather than because of the property they are purchasing.

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An easy way to fix this is to not use all your borrowing capacity. If you are stretched financially, it will be hard to hold onto a property. So instead of borrowing $500,000, borrow just $400,000 and look at more affordable areas to invest in.

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At the same time, you can also look at putting up a higher deposit which also might help with a lower interest rate and avoiding things like Lenders Morgage Insurance (LMI).

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There are also other tricks you can use. If your property increases in value rapidly (because you bought well), you can look to refinance and cash out some of the equity. But instead of spending it, you can just park it in an offset account and keep it for a rainy day.

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The key to property is being able to hold onto your investments for as long as you can. So you want to make sure you're doing everything you can to achieve that.

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While you can’t reduce the risk of holding a property to zero, you can make smart decisions which will mean you have reduced your risks and also put steps in place to ensure you’re covered should an unforeseen event take place.

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