What are the risks of property investment?

Investing in property can be a lot of fun and very exciting when you are doing so for the first time. Online gurus promise there are riches to be had, and while there are many benefits to property investment, there are also risks involved.

Key risks of property investment include: tying up your money, being unable to find tenants, ending up with bad tenants who don’t pay or cause damage, unexpected maintenance costs, and a poor sale price.

A lot of investors will tell you all the positives, how they’ve made lots of money and built a property empire, but few will highlight risks that can land you in financial hot water.

I am going to outline some of the most common risks which are associated with property investment. By knowing these risks, you will be able to assess whether you are willing to take them or if you would be better off investing your money elsewhere.

Tying up you money

Investing in property inevitably means you’ll have to tie up money for a long period.  As a property investor you don’t just buy, you must also renovate and market it before gaining any rental income.

If you’re not careful, this could mean that you end up tied down for years without making any money from your investment. This is why it’s important to set aside enough funds to cover both buying and renovation costs.

You should also make sure you have sufficient funds available to cover any unforeseen expenses such as repairs, legal fees, mortgage payments, and other bills.

Also, consider that there is a lack of liquidity when investing in property compared to other types of investments.  Liquidity is the ease with which you can gain access to the money you have within an investment, for property investors it means you would have to sell in order to unlock your money, and that’s not a quick process. 

Inability to find tenants/empty property

A property that isn’t being rented is a property costing you money.  Minimising the amount of void time (where no one is renting) is a key factor in being a successful investor.

When you are calculating potential annual rental income from an investment opportunity, make sure to take a cautious approach and factor in some void time, don’t assume you’ll have tenants 100% of the time.

When rented, all outgoings should be covered, and you should make a profit each month.  However, if there is no rent being paid you’ll have to cover all costs out of your own pocket.

If you intend on investing in property, and are taking out a mortgage, it is important to have enough money saved so that you can make your monthly mortgage payments even when the property is empty.  Building a property portfolio can help mitigate this risk.

Maintaining a rainy day fund allows you to cover these payments, you don’t want to get into a situation where you cannot make your monthly payments and the lender is chasing after you, sending “last demand letters” and potentially starting the process of taking back the property (called repossession).

To ensure continuous rental, keep the following in mind:

  • Be sure to invest in the right location that already has properties available to rent, that demonstrates there is a demand;
  • Keep the property well maintained, in good condition and clean;
  • Advertise as soon as possible, be that during initial renovations or when you receive notice from an existing tenant.

While you want to keep it rented out as often as possible, don’t forget that it will need maintenance work.  Having short gaps is the perfect opportunity to address any outstanding issues or to freshen the place up with a coat of paint or replace worn carpets.

Bad tenants

What’s worse than no tenants?  BAD TENANTS!

These are tenants who don’t pay on time (or at all in some cases), who don’t respect the property and end up causing damage, who disrespect neighbours, who allow others to live there or who sneak in animals when it’s a pet free property.

These kinds of tenants are draining both financially and emotionally, and they can end up causing you a lot of stress.

What are risks of property investment? Bad tenants that cause stress and financial debt.

It’s best to avoid bad tenants by ensuring you get references and check them, or appoint an agent to vet them on your behalf.

To help mitigate the problems caused, you can take out landlord insurance. That can certainly give a level of comfort in these tricky situations.

Honestly, it’s better to leave the property empty than have a band tenant.

Our bad tenant experience!

We had a terrible time with a bad tenant in one of our properties. It is one of our properties in the North East which was being managed by an agent. They had advertised for a tenant and did all the relevant checks and referencing etc. They found a tenant who received Local Housing Allowance (LHA) benefits. We were happy with this as she was receiving monthly payments from the council so we thought our rent would be safe.

It all went very well for 12 months until she had a change in circumstances. She was supposed to notify the council of this but she didn’t. They, therefore, stopped paying the allowance to her. In order to restart the payments, she simply had to contact the council and fill out a form. She couldn’t be bothered to do this, as she still had a roof over her head. She didn’t care that we weren’t receiving rent.

We asked the agent to start repossession proceedings. This took in excess of 12 months. It didn’t help that the agent completed the wrong form so it delayed us for 3 months! When you start repossession proceedings it’s important to use a very experienced company, like Landlord Action for example.

In the end, the tenant refused to leave. The agent had to go in with the bailiffs and gain entry to the property in order to make her leave. It was a very stressful situation. She’d been living in our property rent free for over 12 months. We had no chance of getting that money back from her. She’d left the property in a mess also which we had to pay to refurbish.

It was a terrible experience and left us hugely out of pocket, but I think these cases are rare and all of other tenants are fantastic.

Unexpected maintenance costs

When searching for investment opportunities it’s only natural to want to rush through the buying process and start generating a positive cash flow.  You might be tempted to skip getting a survey done, but savvy investors understand that spending a little during the purchase process can save a lot in the long run.

All types of property for sale will need some renovation work.  If you’re lucky you’ll find somewhere in a great location that has been well maintained and just requires a refresh before hitting the rental market.

A survey will help identify areas of concern that you, as the landlord, will need to address.  If you don’t have a survey you could have hidden problems that come to light only when you’ve rented the property out.

Such issues can cost thousands to correct. If discovered during the purchase, you can renegotiate the price as it impacts the property valuation.

Poor sale price

Property prices in the UK have seen an incredible increase over the last decade, but just because they’ve increased doesn’t mean they’ll always increase, they can go down as well as up.

Any investment in property should be seen as a long-term strategy for increasing wealth.  While there is always an investment risk, property is generally safer than other forms of investment and any downturns are usually recoverable given enough time.

A key issue you could face is if the area faces a decline in prices, you may find your rental price is too high for the area.  This can be an especially hard situation if your mortgage payments don’t allow you to reduce the market price of your property, other landlords in the local residential market might be in a better position to gain tenants than you.

The worst position to be in is one of negative cash flow, where you have less money coming in than going out.  

This is why it’s important to check out the local area before purchasing.  Check out the local shops, restaurants, schools and other facilities. Even if there is a slump, will people still want to move into the area?  If the answer is yes, the risk is lower.

Ready to invest in property?

We’ve discussed some risks involved in the property market, if you feel comfortable with these and are ready to learn more check out our free getting started guide.

Written by Julie Hanson

Julie is passionate about property – development, investment and portfolio planning. Along with husband Alec, Julie is actively building a property portfolio while helping others to do the same.

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