How to Avoid the Pitfalls of Property Investing – PART 1

For most people, purchasing investment property is a road to wealth. Real estate agents, investment gurus and financial advisers all sing the praises of buying investment property as a sure fire way to make money. Whenever the topic of buying property for investment is written about in the media only the positive aspects are talked about. There is never any discussion of the negative aspects.profit-risk-loss

This article seeks to outline some of the pitfalls of investing in property. By highlighting the negatives I am hoping that it will help those who are thinking about investing in property to become aware of the risks involved.

Don’t get me wrong. Investing in property is a great way to make money but it is important to be aware of the risks. I have identified 2 common risks associated with buying and owning investment property. They are:

  1. Paying too much for the investment property

This is a common pitfall for the property investor. To purchase a property below current market values requires a lot of hard work and due diligence. It is not easy to do. Given that most people buy only one investment property and therefore are not professionals continually investing in the market the result is that most people pay too much for the property they buy.

This is okay if the investor is going to hold the property long term but can cause heartburn if the market drops in value. The classic example of this was during the years leading up to the GFC in 2008. 2006 and 2007 were boom years in the Australian property market which saw many new investors pay very high prices for properties. When the GFC arrived the real estate market fell from 2008 through to 2012 and many properties fell dramatically in price.

This situation is fine if the investor is going to hold the property long term and has the financial capability to do so. At some point in the future the market picks up and eventually the price of houses increase and the property you bought becomes worth more than you paid for it.

For many investors it may not be possible to hold on to a property during a down turn. This means they must sell the property and possibly take a large loss. This can have severe consequences for many investors’ financial future.

The important lesson to learn is if you decide to buy an investment property, make sure you are able to hold it for a period longer than 5 years so that you will be able to survive the property cycle. At some point after buying a property the market will go down and it will test the resolve of many an investor as to whether they should hold the property and hope prices rise or sell it and cut their losses. If you have decided to hold the property long term and have the financial ability to do so then you will eventually make money in property.

  1. Losing a tenant

Losing a tenant, especially a good one, can create a difficult situation for the property investor. Once a tenant leaves a property a new tenant has to be found. If the rental market is booming then this may not be a problem but if the market is slow then it can become an issue.  If the market is slow then it may take time to find a suitable new tenant.

During this time the property owner still has to meet the ongoing costs of owning that property. Expenses such as mortgage payments and council rates still need to be paid even though there is no rent coming in. To survive this situation the investor needs access to funds to pay for these costs.

To avoid this pitfall it is usually best to make sure that an investor has access to a funding source specifically set up to cover this contingency. This can be done be either borrowing more money than is needed to purchase the property and putting the extra funds in an offset account attached to the loan or earning enough money at a job or business to be able to cover any shortfalls that arise. Either way it is vital that an investor has plans in place to be able to handle such a contingency.

Finally, Investing in real estate can be a terrific way to make money but it does have pitfalls. This article is part 1 of a 2 part series looking at the various dangers that could threaten the average investor. Make sure you look for part 2.

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