It’s a mistake to think property investing is without risk. There is a dark side to this business that could cost you in a big way. By Nila Sweeney
This article first appeared on our sister publication: Your Investment Property
Let's get this straight. I'm a big fan of property investing and I believe everyone should have a go. But I feel compelled to talk about the often glossed over downside to investing in property.
Over the past 8 years of editing Your Mortgage and Australia’s favourite property magazine, Your Investment Property, I’ve come across so many instances where investors got burned in so many different ways.
Many of the so called advisors in the real estate market don’t often talk about what could go wrong. They don’t talk about the difficulty of getting tenants, the stress of dealing with tradies who botched your renovation projects, or the strain of meeting your financial obligation month after month.
Instead, they highlight the sexy aspects such as tripling your money in one week without doing any heavy lifting or making millions within a year.
Unfortunately, the truth is anything but… and here are the reasons why:
1. Vacancies are more common than experts want to admit
Even in the most in demand and tightest rental markets, more often than not, you will experience vacancy. Even if you buy the best property in the best location, you are not immune to this unpleasant reality.
I know, I was in this situation not so long ago. In fairness, I bought the property towards the end of the year and after the renovation, put it in the market. I can blame it squarely on the timing - it was a couple of weeks before Christmas - but the reality is that my shiny, newly renovated house sat in the market for about three weeks before the tenants moved in.
If you invest in an area where there are a lot of rental properties, the competition is even higher and you could lose tenants who can find a cheaper rental property than your own.
2. Maintenance cost can eat up on your rental income
Many experts say that if you buy a new property, you’re pretty much guaranteed that your maintenance is low. Really? Try telling that to a landlord who has to spend thousands of dollars rectifying plumbing or electrical issues on a new property.
If you buy an older property, be prepared to allocate at least 1.5% of the purchase price for maintenance issues. There will be broken cupboard doors or electrical and plumbing issues on a regular basis.
3. You could overpay
You know the drill; you see a property, get so emotionally attached. You start imagining yourself in that bath or in that amazing kitchen making awesome dinner for you and your family, even if it meant to be an investment.
Without realising it, boom! You’d do and pay anything to get that property. Despite doing your research and due diligence, that wild card, that is your emotion, could betray you at the last minute.
4. Tenants disproportionately have more rights than landlords
This is another biggie that you should really get your head around if you’re planning to invest in property.
There are so many things you can’t just do to your property if it’s tenanted. For example, you can’t do a reno, or even just casually drop in without giving your tenants ample notice period.
Tenants can also alter the property without asking you, for example, they can paint or install some fixtures without your consent. They should, but you won’t know about it until the next inspection.
Lastly, you cannot just kick out your tenants if they miss their rental repayments. You have to go through weeks (roughly a month) before you can start the eviction process. During this time, your property is held at ransom by the errant tenant.
5. You could have a dodgy tenant
This really should be right on top of the list, but I prefer to think of people as fundamentally good. But the reality is, there are bad apples out there and there’s no amount of due diligence or tenant screening techniques that would uncover the bad ones. We’ve been lucky with our tenants, but I've come across many landlords who lost a lot of money due to damaged properties even with their landlord insurance.
6. Your property could get flooded/burned
There’s really not much one can do if Mother Nature decides to dump massive amount of rain and flood your property. If it’s located in the flood-prone area, you can somehow mitigate this by paying extra to cover the flood damage. But the reality is, you would still lose income during repair or reconstruction period. The same goes with fire. Even if you’re fully covered by insurance, there will always be losses that you will have to confront.
7. It can be difficult to sell your property
Ok, I haven’t sold any property yet so I can’t really speak from experience, but a quick glance at RP Data reports reveal that some properties could sit on the market for a whole year before they’re sold. This can be quite challenging especially if you are desperate to offload that investment. Sometimes, the pricing also has a lot to do with the slow movement. Many agents have this silly and highly illegal practice of underquoting to bait potential buyers. The danger is that you are attracting the wrong crowd and end up not getting any offer, and your property gets stale in the market.
8. There is no guarantee your property will go up in value
Even if you’ve done your research, got advice from the most prominent advisors, and bought in the hottest suburb forecast to soar in value, there is absolutely no guarantee that your property will go up in value every year. Unlike the share markets, property markets move very slowly and there will be years when prices will not move at all.
9. It’s expensive to buy and sell properties
This is one of the biggest hurdles for people trying to break into property. It cost a lot of money to buy and cash in. When you buy a property, you have to pay for stamp duty which is calculated based on the purchase price. Then there’s the legal fee, the inspection reports, property valuation and buyer’s agent if you used one. Oh, don’t forget about the deposit.
If you’re borrowing larger loan compared to the property price, you’d need less deposit, but beware that you will have to make higher repayments. I reckon you’d need to factor in at least 35% of the purchase price to cover these cost.
When it’s time to sell, you’d have to pay capital gains tax if the property goes up in value, in addition to legal and other miscellaneous cost, which can be prohibitively high.
10. You could get sued by your tenants for negligence
Australians are known to be one if not the most litigious people in the world and there is a chance that your tenants could sue you for negligence, damages, personal losses or anything that they can think of. Even with your landlord insurance, you are not totally immune to massive claims if your tenants are determined to sue your ass off.
Next post: 10 great reasons why you should invest in property. If you’re looking for inspiration and general motivation, read my blogs at nilasweeney.blogspot.com
Nila Sweeney is managing editor of Australia’s leading property investment magazine, Your Investment Property, Canada’s only property investment magazine, Canadian Real Estate Wealth and Your Mortgage magazine. An active property investor herself, Nila owns a number of properties in Australia and overseas. She has worked as a TV journalist for CNBC Asia and CNN International for more than 10 years and has been writing about the Australian property markets for more than eight years.