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.
Many of the so called advisors in the real estate market don’t often talk about what could go wrong. Instead, they highlight how you can triple your money in a week or make millions.
Unfortunately, the truth is quite different. Here’s why:
1. Vacancies are more common than experts admit
Even in the most in demand and tightest rental markets, more often than not, you will experience a vacancy. Even if you buy the best property in the best location, you won’t be immune to this unpleasant reality.
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 yours.
2. Maintenance costs can eat up 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 spent thousands 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. 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 and get emotionally attached. You start imagining yourself in that bath or in that amazing kitchen making awesome dinner for your family, even if it is meant to be an investment. Then you end up paying anything to get it. Despite doing your research and due diligence, your emotions could betray you at the last minute.
4. Tenants disproportionately have more rights than landlords
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.
Tenants can also alter the property without asking you. They can, for example, paint or install fixtures without your consent and you won’t know about it until the next inspection.
You also cannot simple kick your tenants out if they miss rental payments. 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 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 landlord insurance.
6. Your property could get flooded/burned
There’s really not much one can do if Mother Nature decides to flood your property. If it’s located in a flood-prone area, you can try mitigating this with extra insurance cover, but you’ll still lose income during the repair or reconstruction period. The same goes with fires. Even if you’re fully covered by insurance, there will always be losses to confront.
7. It can be difficult to sell your property
A quick glance at RP Data reports reveal that some properties can sit on the market for a year before selling. 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.
8. There is no guarantee your property will go up in value
Even if you’ve done your research and bought in the hottest suburb forecast to soar in value, there is no guarantee your property will go up in value every year. Unlike shares, property values move slowly and there will be years when your property’s value will not move at all.
9. Buying and selling properties is expensive
This is one of the biggest hurdles for people trying to break into property. It costs 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 are legal fees, inspection reports, property valuation fees and a buyer’s agent to think of, if you used one. And don’t forget the deposit.
If you’re borrowing a larger loan relative to the property price, you’d won’t need as large a deposit, but keep in mind that you’ll have to make higher repayments. You should probably factor in at least 35% of the purchase price to cover these costs.
When it’s time to sell, you’ll have to pay capital gains tax if the property goes up in value, in addition to legal and other costs.
10. You could get sued by tenants
There is a chance your tenant could sue you for negligence, damages, personal losses or anything they can think of. Even with landlord insurance, you are not totally immune to claims and if your tenants are determined to sue you.
Can you afford to buy in this suburb? Find out how much you can borrow