How to minimise your risk as a property investor
In terms of money-making ventures, property investment is certainly one of the safer options, as you have more control over your assets.
Sydney and Melbourne real estate values have soared 15.56 and 12.78 per cent respectively
Investing in property can offer consistent profits, as figures from CoreLogic RP Data reveal that Sydney and Melbourne real estate values have soared 15.56 and 12.78 per cent respectively over the 12 months to October 2015.
However, it isn't without risk, especially if you make important decisions without the support of a buyers' agent. In light of this, is there a way to minimise the gamble?
A traditional method in any form of investment is to spread your allocation of funds across the spectrum, like property, cash, shares and bonds. This technique can also work well focused entirely on your property portfolio.
Here are a few ways that diversification can minimise the risk of real estate investment, and how a property buyers' agent can help.
As you are most likely aware, the property market acts in cycles, and BIS Shrapnel asserts that these can last anywhere from five to eight years. These sequences usually include around two years of competitive growth, with the remaining years containing relatively slow growth or even price falls.
If you're investing in multiple properties, it's a good idea to spread the risk across suburbs in different stages of their individual cycles – a competent property buyers' agent will be intimately aware of where each area sits in their cycle.
It's a good idea to spread the risk across suburbs in different stages of their individual cycles
This way, if one area experiences a sudden fall, you will still potentially have property in suburbs that are performing steadily or near their peak.
Figures from the Australian Bureau of Statistics suggest that you should stick to capital city areas, as around 80 per cent of Australia's population are focused there, meaning regional suburbs typically offer less growth and consistency with the reduced demand.
To diversify, it is likely that you will have to invest in an area that you're unfamiliar with. Costs like utilities, ongoing maintenance, stamp duty and other taxes can all vary considerably between states. Fortunately, your local buyers' agent will be able to support your real estate pursuits with their expertise.
Regardless, you should always do your research, and the Australian Securities and Investments Commission (ASIC) recommends asking questions like:
- What have homes been selling for?
- How long is it taking for homes to sell?
- Does the area have low prices in relation to the surrounding suburbs?
- Are there positive developments happening in the area?
The type of property
Purchasing a residential property to rent out is undoubtedly one of the most popular forms of investment, largely due to its simplicity and proven potential for profits.
The ASIC stresses the importance of evaluating the potential rental yield of different dwellings, which is the annual gross rental income as a percentage of the overall property value. This can help to ensure that your investment is a profitable one!
Bearing this in mind, apartment units are quite popular among investors as they generally require less maintenance and receive lower utility and tax fees than freestanding homes. On the other side of the coin, units attract body corporate or strata fees and owners can be obliged to go to regular management meetings.
Houses usually offer superior capital growth, as a report from CoreLogic RP Data shows the combined capital city value of houses grew 11.1 per cent over the year to July 2015, while units rose 7.2 per cent. What's more, a house will often be more attractive to a family, encouraging long-term leases.
Diversifying between the two is an effective way to ensure you're getting the best of both worlds, in addition to newer and older properties. A property agent will be able to help you identify suitable homes to spread your risk.
Renovate and sell
The idea of buying a property and doing some renovations before reselling can pay dividends, provided you're operating in the right conditions.
It's a smart option to also have steady rental properties under the rein of investment property managers
First of all, you need to purchase the property at a great price. Due to their extensive network of real estate professionals, a competent buyers' agent will be able to help you achieve this by providing you with exclusive access to private house sales before the general public.
Another beneficial factor is a hot market – the aforementioned rises posted by Sydney and Melbourne would provide the perfect environment for 'flipping' a property. However, it's important that you don't get carried away with your renovations and overcapitalise, essentially removing any chance of profit by spending too much.
While a renovation flip can provide you with substantial short-term gains, it's a smart option to also have steady rental properties under the rein of investment property managers in your portfolio to minimise your risk.
Using a buyers' agent
Your property buyers' agent will have your best interests at heart. They will use their resources and expertise to help guide you through the market, giving you the best chance of achieving your real estate ambitions.