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4 Inherent Risks of Property Investing

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The purpose of this article is to identify potential risks associated with real estate investing, and how investors can manage them.

With any type of investment comes risk. Your level of comfort with investment risk will usually depend on your current financial situation, age and your personal circumstances at the time.

The principles of working out your level of comfort with investment risk are the same no matter what type of investment you are considering.


For example, if you are a property investor coming close to retirement, your appetite for risk would likely be different to a  younger investors forecasting for retirement.

These investors may be more open to speculative investments and, for example, could be more considerate into buying property in need of renovations to gain capital growth.

Risk 1 - Vacancies

Finding the right tenant for your investment property can be difficult in some situations.

Before you settle on a desired tenant, do some research on the rental capacity close to where your investment is located so you can gauge the standads of rental accommodation available.

This will help you understand who your rental market is and the type of people looking to rent in the area.

You can also research the vacancy rate and vacancy rate change in your suburb.

The vacancy rate is a useful statistic that you can use to help ascertain rental demand.

It is calculated and expressed as a percentage, by comparing properties that are listed as available for rent to those that are counted as investment properties.

Real Estate Investar subscribers can use these figures when searching for investment property opportunities.

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Managing tenancy vacancies is one part of handling the risks associated with being a property investor.

It is always a good idea to keep some savings in reserve in case a tenant leaves unexpectedly, to keep your offset account topped up, and to withstand a few repayments without your input in the event of a vacancy or tenancy issue.

Liquidity

Liquidity is the ease in which you gain access to the money you have within an investment. One disadvantage of real estate investments is the lack of liquidity compared to other types of investments, which can force the investor to think long-term.

When contemplating which type of investment option suits you, consider your need for liquidity in funds for risk management.

Once determined, you will have a better understanding if you can afford to take the risks associated with real estate investment.

Real estate investment forces investors to buy and hold for longer than most other types of investments, which can be a great risk management strategy for those who have not had much financial gain from other forms of investments in the past.

Insurance

Real estate is a viable investment option for many investors due to the capacity to protect your investment from the inside out. An insurance policy is easy to obtain and is a means of managing the risks associated with real estate investment.

You may never have to make a claim but home insurance is a necessity for both investors and homeowners and there are various types of insurance cover to suit your circumstances.

It is recommended that investors have Income Protection as well in the event you become unable to work.

Income Protection will pay you a percentage of your income so that you can keep up with your expenses if you are sick or injured. Insurance is a must-have in managing the risks associated with your real estate investment.

Debt gearing

Debt gearing is a serious consideration when managing the risks associated with real estate investments.

Debt gearing is the difference between the debts owed on a real estate investment and the equity within the investment.

The debt to equity ratio is determined by the purchase price and borrowing amount, the more distance you place between what is owed on the property and what it’s worth, the better – this lowers the risks opened up.

Equity is the value in your property, greater than what you owe the bank.

If a property you own is worth $440,000 and you owe $200,000 on your mortgage, your equity is $220,000.

Your debt-to-equity ratio is 45/55, as your debt equals roughly 45 percent of your home's fair market value.

Avoiding the temptation to over borrow is another way to manage your debt gearing risks.

When securing finance for a property purchase it is important to consider how an interest rate increase would affect your ability to make mortgage repayments on the property.

If this is a concern for you, a fixed rate option could be a solution to help eliminate this risk.

Learn more about the pros and cons of fixed and variable rates here.


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