Are You Ignoring The Risks In Your Investment?
Even in the best of times, a wise investor will consider the risk of what could go wrong rather than just focusing on the rewards.
Establishing the risk around purchasing property can be one of the smartest moves you make when you’re out in the market. It doesn’t mean you have to play the cynic or think negatively, but it can be beneficial to think what might happen in any event, not just the ones where it all goes to plan.
Don’t assume you need to avoid risk either. Depending on your age and your financial situation, risk could be considered a good thing. As they say, high risk can equal high reward.
Here are 7 elements of risk that are worthwhile considering when you’re looking to purchase your next property.
By industry I mean economy, and by economy, I mean money. The more money that flows to an area from multiple sources, the more resilient it will be in times of hardship and the more likely the assets within that area will hold their value.
Areas such as major capital cities would rank as low risk for example, whereas small towns that rely on one industry alone would be considered a much higher risk moving forward.
People drive demand for housing, so it stands to reason that the more people there are, the more demand exists in the market as a whole. Larger populations mean stronger demand overall while smaller populations often have lagging markets.
Many “up and coming” areas are touted as the next hotspot if there is an expected level of population growth. Remember though that unless the area has a proven track record and consistent increases, then it is inviting a higher level of risk.
3. Price point
Much like industry and population, the more activity at a particular price point, then the lower the risk level. If you ever need to rent it or if you ever need to sell because your financial situation has headed south, you know you could always find a buyer quickly.
Aiming at a price band that sits within 10% to 20% of the median tends to lower risk considerably and doesn’t leave you holding a niche product that appeals to only a very small percentage of the population.
4. Operating costs
While units attract strata fees and are required to be paid on a quarterly basis for the upkeep of the building as a whole, units themselves are typically lower maintenance than houses.
Homeowners, on the other hand, are dealing with a much larger surface area. The chance of major repair work is much higher with a house and as a result, attracts a higher level of risk that significant costs could be incurred.
Unit owners don’t have it easy all the time though, and many face the burden of having to pay very high strata fees to maintain lifts, pools, gyms and concierge services. Not only do these services attract high operating costs, but the repair costs should they break down are excessive.
While you may want to aim toward the majority of the market – something that will appeal to everyone – such a strategy can attract risk by failing to stand out at all. This is often seen in high-rise apartments where many units within the building are renting or selling at the same time. They all have the same layout and similar views, so they end up butchering each other on price. Many remain on the market for months.
A lower risk strategy looks for a level of scarcity or uniqueness within the property – something that will make it stand apart from the others in a favourable light. This often can be achieved with something as simple as:
- A small, boutique block of units
- Water views
- Period features
- A unique position near the beach or a park
- An oversized courtyard
- A large storage room
A stand-out factor like this can put it miles in front of the market should you ever need to sell or rent the property.
From a risk perspective, if you can’t feel and touch a product there is an element of risk that you are opening yourself up to as you may not end up with what you paid for (it is not uncommon for a sales display office to be built far better than the actual apartment you purchase).
Many new buildings also have teething problems at the start of their life as well. These can often be avoided by waiting a few years before buying into the building.
There’s still plenty of depreciation to be had, and any trouble can be minimised or at least measured.
7. Tenant appeal
The final element of risk is that of tenant appeal. If your property is an investment, then your tenants are the cornerstone of that investment as they are the ones who will pay the majority of the mortgage repayment.
Like many of the other factors shown here, a lower risk strategy aims to appeal to the majority of tenants in the market while a high-risk strategy may appeal to only a few.
The level of appeal can vary between markets, so it’s always wise to consider who the majority is. For instance, tenants in regional areas may dominate the 3-bedroom house market while those in the city may prefer 2-bedroom units. Many aspects of appeal are universal though. Most tenants prefer properties with plenty of light, convenience to transport and shops, access to the outdoors with a balcony or yard.
So, while there are fortunes to be made in particular niche areas of the market, such as a dedicated mining town or student accommodation, these areas can be considered highly risky. By being aware of the risk factors surrounding your next purchase you can rest assured that your property will do well in the good times and also weather the storm in the bad.