Anyone who invests in property believing it’s going to be risk and hassle free is making a mistake, as there are always risks involved
No matter how much research you do, how much due diligence you invest in and how well you prepare yourself, it’s a mistake to think property investing is completely without risk.
Obviously there are huge upsides, with the potential to build your wealth and create a strong financial future that you may not be able to achieve through your career on its own. But it’s important to show both sides of the coin – and when it comes to real estate, the downside to investing in property is often glossed over. Here are just a few of the ugly truths about property investing that all landlords should be aware of:
- You could get ripped off
When you find a property that ticks all the boxes and you’re ready to make an offer, your emotions can swoop in and derail your logic. Despite doing your research and due diligence, that wild card, your emotion, could betray you at the last minute by encouraging you to pay more for the property than it’s actually worth.
This often happens when a person gets so invested in the deal that they try to move mountains to get it across the line. The end result? You pay more for the property than it’s worth. In other words, you get ripped off.
- Vacancies are more common than the experts admit
Even in the most in-demand, tightest rental markets, you can experience periods of vacancy. In fact, even if you buy the best property in the best location, you are not immune to this unpleasant reality.
Having to cover the mortgage for a couple of weeks (or worse, a couple of months) between tenants might not break the bank. But as you build your portfolio and have several properties to manage, these costs can add up. If you invest in an area where there are a lot of rental properties, competition is even higher and you could lose tenants to those landlords who offer a cheaper rental property than your own.
- Maintenance can cost a bundle – even on newer properties
Many mistakenly believe that if they buy a new property they’re pretty much guaranteed a low-maintenance investment.
THE REAL COSTS OF BUYING
Depending on the lender and its investment loan criteria, this is usually 10–20% of the purchase price
Lenders mortgage insurance
This insurance premium is payable on all loans where a deposit of less than 20% is provided
While it varies between states and territories, this generally costs between 2% and 5% of the purchase price
Legals and adjustments
Your conveyancing bill will include professional fees, search fees, and adjustments on council rates and water
Sounds fair enough, right? Wrong! In reality, tenants in newer properties have higher expectations, so they’ll be on the phone to you the moment they discover an electrical socket that doesn’t work. Appliances also tend to have shorter life cycles these days, meaning you may have to fork out for dishwashers and dryers only a few years in.
- Tenants have more rights than landlords
As the landlord, you may feel like you’re in the box seat. But did you know that your tenant ultimately has more rights and protections than you do as the property owner? There are many, many things you can’t just do to your property when it’s tenanted. For example, you can’t simply decide to renovate; you must give the tenant notice and, if the renovation would substantially impact their use of the property, you may be required to provide them with temporary accommodation. You also can’t casually drop in without giving your tenants ample notice.
- You cannot evict a tenant immediately
Let’s say your tenant has stopped paying rent. It seems fair that if they’ve stopped paying for their accommodation, then you should be able to take their access to said accommodation away, wouldn’t you think? If you stopped paying your hotel bill, the management would kick you to the curb.
When it comes to residential leases, however, you need to give your tenants notice, to allow them the opportunity to catch back up. The same goes for bad behaviour – you can’t simply evict them for throwing loud parties, disturbing the neighbours and mistreating your property. There are strict rules and regulations around issuing your tenants with breach notices, and the processes around these can take weeks (and in some cases months), during which time your property is effectively held to ransom.
- Tenants can hold you to ransom
Following on from the last point, it’s important for landlords to be aware that they can find themselves between a rock and a hard place if their tenant starts behaving poorly. Let’s say they stop paying rent. You can go through the process of having them legally evicted, which may take weeks. But what happens next?
What if the tenant refuses to leave? What if they are absent and all of their belongings are in the home? In these cases, you could be forced into a situation where, to get them out, you have to physically remove their belongings and put them in storage – at your expense. It’s not fair, and it doesn’t happen very often, but it is a risk of owning property that people rarely acknowledge.
- It’s expensive to buy property
This is one of the biggest hurdles for people trying to break into property: it costs a lot of money to buy. When you buy a property, the big cost centres are the deposit and stamp duty, followed by legal fees, inspection reports, property valuation fees and buyer’s agent fees, if you used one.
- It’s also expensive to sell property
On the flip side of the coin, it costs just as much to offload your investment. When it’s time to sell, you will have to pay real estate commission and legal costs, in addition to capital gains tax if the property goes up in value.
- Your property could be damaged
In reality, the risk of your property being wiped out in a fire or flooded beyond repair is very low. Furthermore, there’s really not much you can do if Mother Nature decides to make her presence known in your neck of the woods!
However, you can prepare in advance for such scenarios (and less significant damage, such as a tenant burning the carpet). You can mitigate the risk by paying extra insurance to cover this type of damage. If the worst happens, you could still lose income during the repair or reconstruction period, but at least your losses will be in the thousands, rather than five or six figures long.
- You can’t trust everyone you work with
We all know the warnings about not working with spruikers and dodgy dealers. However, sometimes there are ‘wolves in sheep’s clothing’ who seem to have your best interests at heart, but who are lining their own pockets rather than acting in good faith.
For instance, if you own a property in a strata building, who is on your committee? Who is responsible for approving expenses? Who is influencing decisions – and are you leaving your investment in the hands of a couple of people on a committee who are there for their own agenda rather than the interests of all owners?
- There is no guarantee of rising property values
Even if you’ve done your research, sought out advice from the most prominent advisors, and bought in the hottest suburb forecast to soar in value, there is still no guarantee that your property will go up in value every year. Property markets move very slowly and there will be years when prices may not move at all.
- It can be difficult to sell your property
Some properties, especially in regional areas, can sit on the market for a year or more before they’re sold. This can be quite challenging, especially if you are desperate to offload an investment.
In saying all of this, there are many upsides to real estate investing, which combine to far outweigh the downsides. The reality is that investors can get burned – however, with the right education, a clear investment strategy, and a handful of risk mitigation tools, there are myriad ways you can make big profits from property.
This article first appeared in MPA's sister publication Your Investment Property