Property is an amazing investment. But every investment comes with it’s own risks. Whilst Property is easily the safest and most secure investment, depending on the strategy you use (use one of the top five strategies), there are still a few risks that every Property Investor faces.
But knowing the risks, understanding them, anticipating and preparing for them, means you as an investor can mitigate the risks and more or less remove them entirely.
Having bought over 200 of my own properties and having helped my clients buy over 1,000 of their own — I understand first hand what the risks are. I’ve made mistakes and been burned by costly mess ups that, if I understood the risks better, I would have been able to stop them from happening!
What I can do now however, is take my experience, and educate others so they can minimise their own risk and maximise the safe, secure output from their investments.
As a whole, the risks come under one of six different risks, so let’s take a deep dive into each…
The first biggest risk to an investor is fear — or rather being controlled by fear.
Investing can be scary, you’re putting forward a lot of your money that you’ve worked hard for and saved towards for years, if not decades. But if you let that fear control your decision not to ever invest, you’re leaving yourself open to far greater risks in the future.
You can’t hope to work all of yout life, save up, and live off of your pension and the pittance of a return you’ll get from your bank. Pensions are risky and bank returns are awful. Not only will you never get to financial freedom relying on these, but you’ll never even benefit from a stable financial income when you retire.
Instead you need to push forward and put aside any fear — well, the bad fear any way. You see there is such a thing as good fear. Instead of being controlled by your fears, by controlling the fear itself you can use it to your advantage.
Any fears you have about investing are valid, there are risks — hence the post you’re reading right now. But that’s no reason not to invest. Instead, let that fear drive you to put everything in place to ensure all risks are mitigated. By reading today’s post you’re working towards that.
Fear can be good — it exists to protect you from threats. But you risk far greater threats by letting fear hold you back — use the fear to prepare for any eventuality, and press forward in your investing.
There are so many other examples in life where we all face fear — and we decide to either push back and keep going, or turn away and let it win.
2. Negative cashflow
The next risk to investors is buying a property with negative cashflow. House prices have risen year on year for a century, which is one of the many reasons property is a great investment.
BUT, I have known investors who buy a property with negative cashflow — believing this will be mitigated and transformed into positive cashflow in a matter of a year or two due to the consistent rises.
In theory, this should absolutely happen — but there are many things out of our control that could lead to a change in house prices. ALWAYS ensure you’re protected from this by always, always only buying a property with positive cashflow.
3. No rules
Having no rules, or having rules that you don’t stick to, is a serious risk. Each and every one of us is driven by our emotions, even more so when it comes to making decisions. But when investing in property, you need a clear head and make decisions that are logical and most likely to lead to a positive return on your investment.
That’s why it’s essential to have rules in place, and then stick to them! So, when investing in property, what rules should you get in place?
There’s many to put in place, and here’s a few of the most important:
-Picking who to work with. In an earlier post, I spoke about WHO you need to work with in property — but when it comes to picking somebody, you need rules that ensure you pick only the best.
-What investment property to buy, linked to point 2. This is a MASSIVE one. If you only decide to stand by one set of rules, it must be these one. In short, I have 6 key rules that I use to guide both myself and my clients on whether or not a potential property is worth buying or not. If the property fails even just one rule, we do not buy it under any condition. Stay tuned as I’ll be dedicating a whole post to covering the 6 rules in detail.
-A third set of rules you should have in place is for dealing with tenants who are overdue on their rent. If emotions take over, you may feel sorry for a tenant and let them have months to start paying you back — but remember why you’re investing in property. To ensure you protect yourself, you need to stand by rules on how long to give tenants before taking action. You can still be humane, but there has to be a limit before you yourself starts to hurt.
4. Lack of a contingency
As I’ve already said, the main property strategies are safe and secure. But there will always been things out of our control that impact our investments. Understanding that fact, and being prepared by having a financial contingency or buffer in place is essential — and is something I always ensure my clients have in place before investing a penny. Here’s just a few uncontrollable things that could happen which a contingency would mitigate.
-House prices fall — Steady increases in house prices is why property is an amazing investment. And house prices have been steadily increasing year on year for the last century. BUT, if the economy falters and house prices fall by even a small percentage, you’ll immediately lose money on your property. Even though the decline should be short term and house prices should resume after a few years, you still need to make up for that loss.
There’s a flood that hits the area that your property is in and there’s a lot of damage you need to pay for. Again, this shouldn’t be very likely as one of the rules you need to have in place is ensuring a property you invest in isn’t in potential flood plains. But if it happens, you have a contingency in place and are not caught off guard.
-Damage to your property can be caused by other things, such as criminal damage. Again, getting a contingency in place covers you and the tenant in the event that happens.
5. One-track strategy
As you can tell, I’m a huge advocate for investing in property — it has changed my life, allowing me to teach 100s of others so they can change their lives too. That said, you never want to put all of your eggs in one basket. Going all in, putting all of your money into one property strategy, or even one investment type (property, stocks etc) is risky.
A common saying is ‘Jack of all trades, master of none’ and whilst it’s true, you should have a few ongoing ‘trades’ to ensure safe and secure investments.
You should invest in at least two different property strategies. In the event that there’s an uncontrollable problem that impacts your investment, it will impact your properties differently depending on the strategy they’re a part of.
The same goes for investments as a whole — put a chunk of your money into property, and the rest into other investments like stocks & shares. Again, if there’s a problem it will only impact one or the other.
This is essentially like having an overarching contingency in place, but it’s so huge and essential that it’s worthy of it’s own section.
6. Ignoring the importance of discount
Why are you investing in property? To get a great Return on Investment (ROI), to get you closer to financial freedom so you can build a safe future for your children, and their children… right?
With that in mind then, what if I told you that you could get a higher ROI and reach financial freedom much faster, if you understood and implemented one concept?
That concept is buying at discount. Buying an investment property at a discount, immediately boosts your ROI massively.
The problem is, investors would rather invest in a property with less or no discount, because it’s easier. Finding properties at discount takes so much time if you don’t use a professional sourcer (which you 100% need to).
They take more time to find because they’re rarer and get snapped up quick — but by being adamant and patient, you’ll be able to grab a great discounted investment property that instantly gives more back to you than a property with no discount.
It’s a case of going back to your rules — and writing another: ‘I will never buy an investment property that doesn’t have more than 10% discount on the value price’.
Don’t rush into buying and let your emotions run wild — stick to it, always buy at discount and you’ll hit financial freedom so, so much faster!
I hope this has been helpful in preparing yourself for the main risks you as a property investor face. Understanding & preparing for each of these is essential to safeguarding you and your hard earned investment money.
Author: Aran Curry