Bessie Hassan | Money Expert at finder.com.au
Like any investment, purchasing an income-producing property carries with it a degree of risk. This is why it’s important that Australian investors know how to minimise their investment risk.
Whether it’s setting aside a cash reserve to manage unexpected costs, investing in different property types across different markets or conducting extensive market research, there are many ways you can lower your risk.
1) Build a cash reserve
Having a contingency buffer of funds is a sensible way to prepare yourself for any unexpected costs you may be confronted with when managing your property. Whether it’s covering costs during an untenanted period, coping with an interest rate rise or having to replace flooring (or perform other repairs and maintenance), there are many unexpected costs that may crop up at one point or another.
Having funds stashed away in a high-interest savings account or a term deposit account could be the saviour that will help you cover these costs when they arise. Depending on your earning capabilities and your overall financial position, try to have $10,000-$15,000 in a cash reserve to help you manage any extra expenses. It’s also a good idea to keep funds for your property investment separate from your other savings so that you don’t blur the lines between different financial goals.
2) Consider a fixed rate loan
While the cash rate currently sits at a historic low of 1.5%, many experts and economists are tipping for a cash rate rise in the near future. Opting for a fixed rate loan will protect you from interest rate rises and will also provide you with greater certainty when it comes to budgeting and managing your cash flow.
Additionally, a fixed rate loan provides greater tax incentives as the interest portion of your repayments is tax deductible.
3) Invest in different property markets
Another risk-reduction strategy is to invest in different property types across different areas or property markets. This means that you won’t be as adversely affected by an economic downturn or by various market trends, such as an oversupply of apartments in a given area.
For instance, if you held three investment properties in a region that relied heavily on tourism and there was a sharp downturn in the tourism industry for that region, you’d risk making reduced capital gain on all of your properties. However, if you invested in different capital markets across Australia (or abroad), you’d greatly reduce your vulnerability to industry downturns.
4) Conduct extensive market research
Undertaking extensive market research is another way to minimise your risk and ensure the success of your investment strategy. Accessing suburb profile reports and analysing market trends will help you understand the factors at play within different markets.
For example, you may want to consider supply and demand within the area by looking at indicators such as historical price growth trends, average rental yield for similar properties, days on market (DOM) and auction clearance rates.
It’s also worth checking out the local council website to see what planned community or infrastructure projects are in the works as this will help you gauge demand for property within the area. It will also help you understand whether or not the council is proactive about new developments and innovations, which is a key growth driver.
Understanding the risks involved in property investing and knowing how to minimise them is an important skill that property investors need to master.
Be responsible with your investments by ensuring that you have sufficient funds to cope with holding costs, you consider your finance options, you expand your portfolio across different markets and you engage in detailed research to understand how to protect yourself. Do all of this and you’ll put yourself in good stead for success.
Bessie Hassan is the Money Expert for finder.com.au, Australia’s most visited comparison site that helps Australians make better financial decisions. Bessie often appears on national radio, TV, and throughout digital publications, sharing her best money-saving hacks and property advice.