Property Investment for Beginners: The Risks
When you ask people for an investment idea, there’s a big possibility you’ll get, “Property investment,” as your answer. You would even get that answer frequently. It’s surely not a surprise if property investment has become the favorite option, it is understandable. If you try to look the positive side of this investment, tons of article will tell you why property investment is promising. It’s anti-inflation, it’s a gold mine, and it’s a basic needs–everyone always looks for a place to stay.
While it’s tempting, property investment also has its own risk. After all, there is no investment without risk. And there’s no exception for property industry. Behind its glorious images, property investment would offer you couples of warnings too. But, it doesn’t mean you have to reconsider your decision to invest in property. These warnings are challenges, not red flags.
Now, to face these challenges, let us prepare you with the risks of investment in property.
The first risks of investment in property is the probability of no one is staying at your property for unpredictable period of time. No one rents it, no one buys it, the property has no tenants in it, and this is a big threat. The property could easily be damaged and not maintained. Then you’re also will have no income as long as you own the property, so you could say the property at that time is not an asset, but a liability–since you have to continue to pay some expenses, but there’s no passive income. Your cash flow would be negative.
Generally, this risk can be caused by two things–either it’s hard to find a suitable tenant, or there’s no rental/buy request in the property’s area.
There are some alternatives to take care of this risk. One, is when you’re on the way to decide what kind of property you’re going to invest. You have to aware if the property is built in its suitable environment. If it’s a house, take look if the area is suitable for family living. If it’s an office building, take a look if the area is suitable for business activities. The first step is crucial, and you need to do some research.
Then, when you’re already own the property, try to use several e-commerce websites to increase the possibility of your property to be found by the tenant candidates. You can use those websites which are specified for real estate or not. Anything to increase the chance. Besides website, you can collaborate too with property consultant. Try ED Realty for example.
PROPERTY INVESTMENT is LACK of LIQUIDITY
When we’re talking about liquidity, we’re talking about how easy for you to gain access to the money within the investment. In other words, if an investment’s instrument has a high rate of liquidity, it would be easier for you to sell or exchange the investment for money.
Now, if you bring liquidity into real estate investments discussion, you’ll find it is lack of liquidity. It’s different to investment in gold or mutual funds. And with that condition in your hands, you need to have a moment to contemplate again whether you’re already well prepared to invest in property industries. You have to look again, what kind of property suits your idea of investments, and also consider your need for liquidity in a way to prepare your risk management too.
Investment in property is really promising, but it takes time and patient to be called profitable. You need a long term strategy and a long term budget plan first before you make any start. Always count your financial stability too.
THE PROPERTY’S POTENTIAL DAMAGE
The third risk of investment in property you should be aware of is the property’s potential damage. Since it has a physical appearance, and is built out in the open, there’s a big chance if the property will be vulnerable. It could be vulnerable to natural disasters, fire, tenant’s carelessness, vandalism or attacked in robbery.
These threats aren’t avoidable, they’re always out there waiting their chance to damage your property. Thus, you should prepare your budget plan for this condition too. Luckily, these days you can apply for insurance for your property, to protect it against the damage. You’re just need to keep in your mind if these insurance need to be paid.
Still, there’s always a way to manage this risk, right?
If you have started a talks about the risks in real estate investment, debt gearing is the topic you will face. Debt gearing is the difference between the debt owed by property investment and its equity and the investment itself. The debt ratio is determined by the purchase price and the amount of fund that are loans. If the difference between those two is getting further, the risks is lowering.
In this subject, there’s also equity to be talked about. Equity means the difference between the property market value and the outstanding mortgage.
Let’s put it in example, if you own a property with 250 million worth and you owe 100 million on your mortgage, your equity would be 150 million. And your debt to equity ratio would be 100 million to 150 million, or equals 2/3 from the market value. Therefore, it is highly recommended to hold back and not loan more than the value needed to minimize the risk of debt gearing.
Do not forget too, there’s also another risk in the increase of interest’s rates that will effect your ability to pay the mortgage. Make this subject as your concern too. The solution could be find a mortgage or home loan with fixed interest rate or a longer.
That’s it. How do you feel now about investment in property? Are you ready to make your first step? Contact us, ED Realty, for further consultations.