As a property investor you might be worried that investment comes with a lot of risk. It is true that any opportunity to increase your personal wealth will present some dangers – and the potential benefits should always be weighed against these dangers.

However, when it comes to property investment it is possible to manage the risks and reduce your chances of running into major problems by making smart choices.

Whilst in the first instance, you should do everything you can to prevent or avoid the risk altogether, if this is not possible there are things you can do to mitigate the effects and soften the blow. Take insurance, for example; although it cannot prevent an incident from occurring, if something were to happen, the impact would be minimised.

Here are some of the most common risks you might encounter, along with strategies you can employ to reduce the likelihood of them happening, or to minimise any financial impacts that may follow.

Risk 1: Your property drops in value

Prevention measures: To improve your chances of securing a high-growth property, you should only buy in locations that are well researched and demonstrate evidence of future capital growth. This includes areas with land supply shortages, skilled labour shortages, increasing populations, and increasing average wages. When combined, these factors tend to put upward pressure on property values.
Mitigation measures: The property market can experience some volatility even if you have bought in an area with growth potential. The best way to manage this risk is to diversify your portfolio across multiple locations and markets. With reduced exposure to a single market your portfolio will be more stable and maintain growth overall. Plan for a long-term investment and remain in the market for long enough to recover potential losses.

Risk 2: You aren’t getting the expected rent return

Prevention measures: To improve your chances of a high rent return, invest in areas with evidence of future growth to ensure ongoing demand. Invest in locations with high rental yield and maintain a positively-geared portfolio to give yourself a buffer for if cash flow is reduced. Again, look for locations with a diversity of employment and industries to reduce your risk.
Mitigation measures: Put your excess cash into an offset account to reduce interest payable, while keeping cash in the account readily accessible if needed.

Risk 3: Interest rates rise

Prevention measure: An interest rate rise is inevitable in the next few years so it should not take you by surprise. To prepare for a rise in the interest rates and reduce the impact on your portfolio, consider fixing your interest rate if it means you can guarantee your properties will pay for themselves for a set period of time. You should also avoid over-extending yourself and keep your portfolio to a size you can still hold on to if the rates go up.
Mitigation measures: Maintain a positively-geared portfolio and keeping a sufficient cash buffer in an offset account to reduce payable interest will help you deal with unanticipated expenses.

Risk 4: You struggle to find tenants

Prevention measures: To minimise the amount of time your property is vacant, engage only reputable rental managers who will ensure your property is actively marketed to your target demographic. You should also be realistic about your expected rent. By keeping the rent high, you may experience longer vacancies that could ultimately cost you more than the extra rent you would have received.
Mitigation measures: Once again, if you maintain a sufficient cash buffer in an offset account, any temporary drop in rent revenue should not become a significant financial setback.

Risk 5: Bad tenants

Prevention measures: While a majority of tenants may be reliable, some may not pay their rent and will treat your property badly. Once again, this comes down to hiring a great rental manager who will conduct thorough screenings of prospective tenants. You should specifically instruct them to avoid tenants with any history of adverse behaviour. Before you buy a property, always research the areas in which you intent to invest in order to ensure the area is reputable and unlikely to attract unsuitable tenants. You are more likely to attract good tenants who are responsible and respect your property if you invest in the middle of the market.
Mitigation measures: Despite your best efforts, you may still end up with tenants who don’t look after your property, so you should always maintain a landlord’s insurance policy to compensate you.

Risk 6: Natural disasters (cyclones and floods)

Prevention measures: Various parts of Australia regularly experience a range of natural disasters, including floods, cyclones, and extreme weather. However, some areas are more prone to these disasters than others. By doing your due diligence you can ensure you do not invest in an area that is prone to natural disaster.
Mitigation measures: If the area you wish to invest in experiences cyclones, ensure the property you intend to buy is built to cyclone codes. Always maintain an insurance policy that covers damage caused by natural disasters.

Risk 7: Problems with your property’s structure

Prevention measures: If you want to reduce the likelihood of poor building standards it’s best to purchase new properties. Engage only the most reputable builders who have a proven track record in your chosen location. Before completing the handover and making your final payment you should employ a building inspector to inspect and re-inspect the property and identify any issues that need to be fixed. Encourage the first tenants of your newly-built property to report all defects within the warranty period (usually six months) so that you can get them fixed free of charge.
Mitigation measures: Again, this comes down to having the right insurance so that any unexpected costs and repairs do not come out of your pocket.

Risk 8: Pest infestation

Prevention measures: Pest infestation can be an expensive issue to deal with. If you invest only in brand new properties, the risk of pest infestation is likely to be minimal. Your building inspector should ensure pest protection systems are installed correctly and that they come with a warranty. Maintain a routine regime of pest inspections and deal promptly with any signs of problems.
Mitigation measures: If you do have to deal with a pest infestation, having the right insurance will reduce the financial impact of having to call someone out to rectify the problem.

Risk 9: You lose your job

Prevention measures: Preventing this from happening really depends on your individual career path and aspirations. However, fear of losing your job should not be a major concern for you as a property investor.
Mitigation measures: Set up your portfolio so that your properties do not require you to contribute cash each week to keep them running. Maintaining a positively-geared portfolio will ensure your properties won’t become a burden if you lose your regular source of income. You should also maintain personal protection insurances, including income protection insurance, to cover you in the event this may happen.

This information should help you identify any potential holes in your strategy and provide you with the structures to reduce your exposure to risks.

It’s worth mentioning that investing in property also offers relatively high returns when compared to the level of risks involved.

Risk management is an important step towards protecting your wealth and making sure your portfolio can grow and survive over the long term. If you haven’t already, you should start implementing a risk management strategy today.

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