Weighing up the risks of buying an investment property
GUEST OBSERVATION
"Property investing is risky – do you really want to do that?"
I am sure you will have heard this before. I know I have, and so have many of my clients. Deep down you have this urge that you should do something about your financial future but you are constantly getting all these “expert opinions” from family or friends that have lost money, or heard about someone that has.
But you still find yourself wondering whether property investing is safe. Are they right?
The truth is all forms of investing have an risk component. From shares, to businesses, property or even simply investing in yourself – they all come with an element of chance. You may lose your money or even worse, they might cost you more money than you originally put in!
Personally, I would run in the opposite direction from anyone that tells you that they have a foolproof investment because there is no such thing. However, there are provisions you can put in place to help reduce your risk exposure, and they might not be what you think.
What’s one of the top provisions I suggest to my finance clients weighing up the ‘riskiness’ of any property investment opportunity?
In case of emergency, have a buffer.
Always factor in a buffer to your figures to lessen the impact of unexpected events you may be affected by. These may include things like being without tenants for some time or abrupt shifts with your employment. No matter the income you earn, or debt level you have, having a buffer is vital to your portfolio’s existence.
Depending on your situation you may want to consider applying for more than you need. Banks like to give you money when you don’t need it so much, not when you do. You don’t pay interest on the funds you don’t spend, so if you are able to, get more than you need for your purchase so it’s there if you need it.
On the other hand, if you’re really pushing your limits for your purchase and don’t have room to do this, it may be time to reconsider the investment opportunity. Investing is great, but if it has the potential to put you and your family under financial strain, or dramatically affect your lifestyle in the face of unexpected events, it’s not going to be beneficial at all.
Another way of incorporating a buffer into your finance strategy is to use lenders mortgage insurance (LMI). This insurance protects the lender, not you as a borrower, but can allow you to borrow more than you could without it. LMI can be a contentious issue, as many mortgage brokers don’t believe in utilising it, even for more dynamic investors. In truth it is quite a complex area but using LMI, if properly considered, can be a great tool for creating buffers and thus reducing risk exposure.
It seems counterintuitive to borrow more to reduce your risk, but if you can safely do so it really is a game changer. Of course, it is always best to discuss the pros and cons of your own situation with a broker before making this kind of decision.
Finance can be tricky but it’s not a mystery by any means. It’s through taking a step like incorporating a buffer that you are able to start to structure your finances and your mindset around risk in a different way, easing the pressure around starting to build a property portfolio. This not only helps you feel more comfortable taking control of your financial future, but in some cases can be very liberating for property investors.
Michelle Coleman is an award winning finance broker and managing director at W Financial.
