The risks of property investment

Diane Foo Eu LynnMay 8, 2017

 

Property investment has always been looked upon as a safe retirement vehicle. But as with any form of investment in the market, property investment comes with its own risks. While the risks are relatively small, if the investor does not have sufficient cash flow, they will find themselves eventually struggling.

Below are some of the risks most commonly faced by property investors.

 

Unable to Find Tenants

 

This is one of the biggest risks faced by property investors, especially in neighbourhoods that did not perform as well as expected. The problem multiplies if the investor owns several units in the same place, and may eventually have to lower their rental to below market value.

If the investor has ample cash flow, being unable to find a tenant will be a mere inconvenience as they will be able to support the mortgage payment via their other investment vehicles. This will however be a major issue for amateur property players who do not have the cash flow and are depending on the rental income to pay off their mortgage loan.

 

Lack of Holding Power

 

There are some investors who can support the purchase of their property investment through their own income even if they are unable to find a tenant for their unit. For those who depend entirely on their own active income however, there is always the risk of a sudden lack of cash flow if they suddenly have an emergency – and then there is always the risk of retrenchment.

Facing these situations, these investors will suddenly find that they have a lack of holding power to hold onto their property. In this case, they may have to immediately find a buyer and sell their property off even if the selling price is below market value.

 

Unable to Get Rid of Property Fast

 

Selling a property is however not as easy as clicking a button such as when selling a stock in the share market. The process will take a minimum of 3 months under the best circumstances, if everybody signs the documents off immediately and the bankers approve of the loan on the spot. This is because it will take time to draw the documents up.

Hence even if a property is worth a fortune, an owner in trouble may not be able to cash out in time to save himself. It is therefore important for property investors not to put all the eggs in one basket.

 

Unforeseen Circumstances

 

Another risk that property investors face is the lack of capital appreciation. In many cases, an investor will buy a property expecting it to appreciate in value. However, if for example the investor already bought the property at above market value, they will have to wait a much longer time than just a few years for the property to appreciate in value. This is not too bad a risk, as the investor may at the very least be able to get their capital back – unless the location itself is a problem and nobody wants to buy a property there.

The bigger risk in unforeseen circumstances is buying a property within a new development, expecting it to be completed within a few years but finding out later that the development has been abandoned.

This problem will not only affect the buyer’s cash flow as they will still need to service their loan, but will also affect their credit report. This means that if they have an insufficient amount of fixed income and they wish to buy another property, they may only qualify for a lower loan amount if at all.

While the risks in property investment are many, conducting proper research will ensure that you escape most of the pitfalls. That being the case, a property investor will need to make sure that they study the subject well.

 

To learn more about property investments, drop an email to zipporahkoh@freemen.com or visit the Freemen Facebook page. For more on Freemen’s upcoming event, visit their page here.

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