As with any investment vehicle, there are certain risks or variables inherent with property investment. When looking to invest, especially in some of the more traditional forms of property investment, there are a number of "what ifs" that should be asked and the investor can then weigh up the answers in direct relation to his or her own interests and risk aversion levels.
1. What if the market turns and I lose my money?
If the market turns, investors can be left high and dry and depending on their level of liquidity and financial solidity, can sometimes have the rug pulled out from under them. If there is a mortgage shortfall or the investor is reliant on rental income and finances become tight, the investment can feel like a noose around the investor's neck. Selling a property in a downturn can be hard and, while hardened investors will sit the downturn out and wait for the tide to turn, others can find themselves with losses, mortgage shortfalls and ultimately negative equity.
2. What if I can't resell the property?
Having invested their hard earned time and money into a property, finding a buyer is by no means a certainty. What pays dividends here is the amount of initial research and study done prior to purchasing the property. If the investor has done their homework or "due diligence" and made sure the property was in a stable, high demand area, (even if that sometimes means paying a little more for the property at the start,) finding a buyer should be a lot easier than if a "bargain" was snapped up in without proper planning in an area that then has a glut of supply and a falling level of demand.
3. What if I can't get a mortgage?
A few years back, this question would have been laughable – it would have been better phrased as "How much mortgage can I get?" as the banks fell over themselves to loan more and more at higher and higher LTV percentages. Suddenly mortgage availability swung in the opposite direction as banks tighten up their act as a direct response to the financial meltdown. Bit by bit we are seeing this tightening ease, in some corners of the globe more than others, depending on how the property markets are performing and how badly burnt the banks were in their own backyards. It is by no means a certainty that anyone will get a mortgage at the current time unless it is guaranteed by the developer prior to sale.
4. What if my investment is affected by market conditions?
Undoubtedly traditional property investment will be affected by fluctuating interest rates and property prices. With Buy to Let investment property, when interest rates rise usually the investor/landlord will raise rents to cover rising mortgage repayments, it can be unpopular with tenants particularly if they are longstanding and reliable.
5. What if I have never visited or heard of the location of the property?
Emerging markets can offer a truly enticing opportunity that some investors find hard to resist. Up until 2008, emerging markets really were seen as the holy grail of property investment. However, since the onslaught of the credit crunch era, that has changed drastically and we are seeing a huge sway back to the more stable, closer to home areas where the demand is still relatively high due to the normal ebb and flow of life rather than more speculative areas with promised future influx.
6. What if I can't find a tenant?
Void periods can lead to a loss in Buy to Let properties, this can be overcome by having a contingency fund in place. (Remember to budget for this PRIOR to making the investment!) A pot of money put aside for periods of time when the property is empty. Landlord Insurance policies can also cover for in the event of vacancy.
7. What if I invest in an off-plan property and the developer defaults?
The risks lie in that all the necessary legal paperwork is rarely available at such an early stage. Should a problem surface later, the whole project could fail from lack of licences, permits and so on. There are obviously ways to mitigate these risks, not least by conducting a good level of due diligence and running full legal checks on the company and individuals you are investing in. Don't rely on rumours or hearsay or what you might read in a forum, check it for yourself, and if in doubt have your own lawyer check it. The time and money spent checking these things is negligible when when you take into account the value of the investment and the time span over which you are likely to be investing.
8. What if I don't need leverage?
Seemingly a good position to be in, if you have enough money to purchase a property outright you are obviously doing something right. By using leverage or borrowed money to purchase a larger income property, you could increase your profit further. To take the full advantage of leverage, put the minimum down on a quality property which has a strong likelihood of appreciating in value.
If an investor puts down a 10% deposit to purchase the property, and the property's capital appreciates by 10% per annum, that’s a 100% return on his investment per annum.
(One caveat to bear in mind, using leverage (a mortgage) will expose you to additional risk i.e. if interest rates rise significantly)
9. What if I didn't factor for closing costs, how much will they be?
Closing costs will be applied when investing directly in traditional property; the amount will vary depending on the location of the investment and the size of the property. They can range between 2 – 10%, sometimes even more of the property purchase price. If you don't factor these costs into a purchase of property then you may lose the property if you don't have the cash.
10. What if I don't invest?
If you have capital and aim to increase your wealth then investing is ultimately better than saving. By saving in the long term the value of your money will decrease due to inflation. Through investing not only can you keep the value of your capital, you can increase it, depending on the investment and timescale.
If you want to remove some of the "what ifs?" in your investment, find out about more unique proven forms of property investment from IPIN here.
- Monday 02 August 2010