How to reduce risk when buying an investment property

Australia’s property investment market has shown signs of growth this year, with the highest value of investment loans written since before the GFC.

Record low interest rates combined with steadily rising rental prices in metropolitan areas means becoming an investor is an increasingly attractive option for many Australians.

Like any investment, though, buying an investment property can involve risk. If you’re thinking about taking out a home loan to finance the purchase of an investment property, here are some tips to help minimise the risk.

Do your homework

Buying property is an expensive enterprise, therefore doing research before you buy is crucial. Do your homework by looking into capital growth trends, rental yields and vacancy rates in the areas where you’re looking to buy to ensure you’re investing in the best possible – and least risky – suburbs.

Choose finance wisely

Apply the same diligence in researching and comparing home loans to get the most suitable option for your needs, factoring in other financial commitments.

“Finding a good deal on an investment loan can make a significant difference to the net return on your investment,” said Michelle Hutchison, spokeswoman for RateCity.

RateCity data shows that interest rates on investment home loans range by 2.17 percentage points, which could mean a difference of $553 each month in borrowers’ pockets or $199,000 over 30 years on a $400,000 loan.

“Lenders are eager to lend to investors so there is real opportunity to negotiate hard and secure a good home loan deal if you do your research,” she said.

Think long term

You always have to buy a property thinking you’ll hold on to it for eight to 10 years, said Toby Primrose, director of Australian Property Investor, a company that helps investors manage their portfolios.

“If you don’t want to do that, trading shares might be a better investment for you,” he said.

Once you factor in taxes, legal fees and other costs associated with selling, you will be slugged with a bill of approximately $30,000 on a $400,000 property, he said. If you plan to sell too soon after you buy, you may even lose money on the sale once you subtract these costs.

Property prices have historically risen in Australia, but it doesn’t happen overnight. As Primrose writes on his company website: “The only question you need to ask an investor is how long I will have to wait to double my money; the answer is usually seven to nine years.”

Don’t be seduced by the ‘flipping’ phenomenon
Spurred on by TV programs such as Flip This House, a growing number of people think they can buy a run-down or off-the-plan property and sell it quickly for a tidy profit. That’s one of the riskiest things a property investor can do, said Primrose, and he warns his clients against it – particularly when it comes to buying off the plan. “It takes five to seven years just to break even when you buy off the plan,” he says.

Primrose says the most effective way to minimise risk is to avoid trying to identify the next hot spot or “reading” the market. Even the experts can get it wrong.

Once you buy, be smart
One of the biggest concerns of any property investor is the risk of not being able to rent their property easily and enduring periods of no rental income. “There are two reasons why a property remains vacant,” says Primrose. “It’s either in a state of disrepair and therefore unattractive to tenants, or the rent is too expensive.”

His advice? Be diligent about the property’s upkeep and do your homework on the going rental rates in your area. Don’t rely on the seller’s estimates of what rent the property may fetch.

If you are buying an apartment, look at what other apartments in the block are commanding in rent, Primrose advises. For houses, check rental rates with local real estate agents.

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