10 risks first time property investors need to overcome

Record sums are being invested in bricks and mortar – but novice investors often fail to fully realise the necessity of managing risk.

Failure to manage risk is one of the key reasons so many property investors sell within a year, frequently at a loss after transaction costs are taken into account.

There are risks at every point on the property journey, from an initial decision to invest, to property selection, financing and tenanting.

Here are a number of risks both novice and experienced investors should be aware of, maximising their chances of a successful investment.

Opportunity cost. Property investment can be financially rewarding but it’s usually negatively geared, at least to begin with, reducing your opportunity to invest in other asset classes or different properties. Can you argue the merits of a property you are considering buying over others in the marketplace and over other types of investment?

Overconfidence. Everyone’s an armchair property expert, but successful property investing requires a commitment to learning, research, patience and planning (a little bit of luck also helps). Property management is also not as easy as it sounds, and investors who attempt DIY tenant selection and management need to be careful not to stray outside the law.

Fear. Committing hundreds of thousands of dollars to a single asset is scary. Sometimes it seems “safest” to buy something near your home – even if that’s not such a great area for investing. While research is vital, fear can also lead to “analysis paralysis”. If you never take the plunge, you’ll never profit.

Naivety. There are plenty of property spruikers happy to take advantage of the unwary, pushing them towards poor investments which leave the adviser with good commissions and the investors with lemons. Do your own research – don’t just rely on your accountant, financial planner or mentor.

Over-ambition. Banks sometimes lend investors more money than they can comfortably repay, particularly if their financial circumstances change. Property investors should consider the need for: access to a cash buffer to shield them in case of unemployment; income protection insurance in case of injury; buildings and contents insurance; and landlord insurance.

Failure to plan. Things change. You need to go through the major “what ifs” to avoid a situation where you may be forced to sell. What if you have a child? What if interest rates rise? What if you can’t find a tenant for several months? What if your tenant absconds or, accidentally or deliberately, damages your property? What if you need a new car?

Lack of a coherent strategy. In order to choose the correct investment property for you, you need to know what you’re hoping to achieve from it. Even well-respected property commentators and authors use very different approaches, so it’s important to read everything you can and choose a strategy which suits your circumstances.

Getting side-tracked. Buying for negative gearing or depreciation benefits alone is a bad idea. The aim of the game is to make money long-term, while managing the risks to ensure you are never a forced seller.

Impatience. Property is a long-term investment. Your property won’t necessarily grow at a steady pace. There will be years where its value remains static or even goes backwards.

Herd instinct. Buying with the herd, when property prices are reaching records, can leave you in danger of several years of sub-par performance. In the words of legendary investor Warren Buffett: “Be fearful when others are greedy and greedy when others are fearful.”

Sharon Fox-Slater is general manager of RentCover landlord insurance, which insures more than 120,000 tenancies around Australia, and is a division of EBM Insurance Brokers.