Buying an investment property remains one of the most popular types of financial investments. Investors are drawn to property for a number of reasons including — the reliability of returns, the availability of finance and property investment tax arrangements.
However just like any other investment, there are some risks associated with buying an investment property. Understanding those risks is essential if you wish to make money on the investment. This article will take a closer look at some of potential hazards you face when buying property.
Buying a Property with Problems
The nightmare scenario when buying an investment property is buying a lemon. If you buy the wrong property, you could be facing repair bills into the thousands. Here are some of the most common problems with the investment property itself.
1) Damp and Rot
Does the property have any issues relating to damp and rot? Look for the warning signs of damp including mould, deteriorating timbers, rust, cracks and stains. Look for any bulging or cracks on concrete foundations as it may indicate that the metal inside the concrete is rusting.
2) Termites or other Biological Pests
These little pests have been responsible for the destruction of many properties. Before buying any property, it must be inspected for termites. Even if only a small amount of termite damage is found, remember that repairs can be very costly.
Mould, moss and algae can do a substantial amount of damage to roofs and gutters. If the property has a lot of debris on the roof, there might be permanent damage that is very costly to repair.
4) An Aging Hot Water System
Examine the hot water system and determine if it needs replacing. It is one of the more expensive items that landlords must maintain.
5) Nightmare Tenants
Are there already tenants in place in the investment property? If you did not check their references yourself you might be buying more than you expected. Depending on where the property is located, problem tenants can cause a lot of drama for property investors.
6) Foundations that need replacing
One of the most expensive repair jobs in a house is the foundations. Look for cracks in walls which can indicate the house is shifting. If the property is on stumps, check that they are in good condition.
7) The Electrical Wiring or Plumbing is a Disaster
Another extremely expensive repair job, bad electrical wiring or plumbing could cost you thousands.
Market Risk and Housing Bubbles
Timing is everything when it comes to investing in property. A smart investor will be able to gauge the state of the property market and determine the right time to invest. The property market might be slowly rising, slowly falling, booming, falling or simply stagnating.
If there is a property bubble growing where prices have grown at an unsustainable rate, it might not be the right time to invest at all. Look for the symptoms of a housing bubble: increasingly unaffordable properties, sudden and substantial increases in house prices, credit growth, lower lending standards and higher mortgage delinquency rates.
The only way to mitigate market risk is to do your research. Look at the prices that properties are selling for, talk to real estate agents and look at general economic conditions. You should look at short to medium term ranges (5-20 years) to decide when to enter or leave the market.
Interest rates play a very important role in determining the profitability of your investment property. Firstly, if interest rates go up, it may have a dampening effect on the property market. So if rates go from 3% to 7% there may be less demand for property in the market, meaning you get a lower price when you sell.
Secondly, higher interest rates affect the affordability of your repayments on any loans you may have. If rates increase a great deal, it will cut into your capital gains.
Inflation can operate in a similar fashion. If the economy enters a period of high inflation while the property market remains flat, you will be losing profitability.
Finally, you should look at other ways to invest and compare returns with the property market. Do your research, get your timing right and choose the right investment property to do well!
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