Four ways to minimise your investment risk
Purchasing an income-generating property carries with it a degree of risk. Understanding and taking action to minimise the risk involved with your investments is part and parcel of owning an investment property. This shouldn’t put you off investing in the property market to achieve your financial goals. Taking steps now will ensure your investment is fortified against life’s curve balls.
Save a little for a rainy day
Don’t stretch yourself thin when purchasing an investment property. Make sure you have some cash in reserve for unexpected costs or life circumstances.
Unexpected costs that can occur are periods of not having a tenant and this can occur for many different reasons, an interest rate rise or having to replace electrics or plumbing. Having a contingency account is a sensible way to prepare yourself for any unexpected costs you may be confronted with when you own your own investment property.
Put cash aside in an offset account attached to your primary home loan to ensure that any small bump in the road can be overcome on the road to financial freedom. Depending on the value of the property, number of properties you own and your financial situation, try to work towards having $5,000-$15,000 in cash put aside to help you manage any extra expenses.
Make the most of low interest rates
When interests rate are low it is the time to consider opting for a fixed rate loan. This 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. Depending on your circumstances this may or may not work for you. But remember, a fixed rate loan has greater tax incentives as the interest portion of your repayments is tax deductible. Consider all your options and seek advice from trusted professional when securing a fixed rate loan.
Don’t put all your eggs in one basket
Invest in different property types across different areas or property markets. Should an economic down turn occur you won’t be as affected. Market trends can impact your investments as well. If all your investment properties are the same type of property such an apartment or they are all clustered in one area you expose yourself to risk of a local economic downturn or market trends, such as an oversupply of apartments. When you rely heavily on tourism or boom town scenarios if there is sharp down turn you risk making reduced capital gain on all of your properties and in some cases failing to let your property.
Do your research
Undertaking extensive market research is another way to minimise your risk and this one key area is essential to ensuring the success of your investment strategy. If the idea of accessing suburb profile reports and analysing market trends is too overwhelming do not skip this important step in managing risk. Instead engage a reputable professional. Any costs up front to ensure your long term investment success is well worth it.
A property professional can help you understand the factors at play within different markets. They have access to historical price growth trends, average rental yield for similar properties, days on market and auction clearance rates. They will also know what planned community or infrastructure projects are in the works and the projected growth for the area.