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Empower Wealth Blog post by Empower Wealth

Reducing the ‘Fear Factor’ in property investing

Without a doubt, one of the biggest reasons people hold back from investing in property is fear of risk. This fear shows up in many different ways, from well thought out objections to procrastination itself.

There are books on the shelves, magazines on the racks, shows about investing and presenters advertising the merits of investing. There are prospective investors out there who buy the books, read the articles, attend the seminars and dream about property investing yet find themselves in the same situation year after year. So why does the fear paralyse prospective investors into total inaction? Most likely because they don’t face all of the fundamental fearful aspects head on. Let’s discuss some of these fears and how we can mitigate the risks involved in each.

The first objection is the obvious one—fear of making a bad location decision and losing everything. A well located property can make the difference between fabulous double digit capital growth and mediocre growth.

Now before I continue, let’s put it into perspective. If we consider Melbourne property over the past 35 years, median house price growth has been at 8%pa. Even if we focus on a fringe outer suburb, the median house price growth has been better than 6%pa over the long term. So as long as the property purchased is in a major capital city, even for those whose purchase selections could be considered bad selections, the upside for a long term hold is still better than investing in cash. The bonus is that with leveraging, the gains are magnified, albeit a ‘bad’ property selection. The risks of ‘losing everything’ when it comes to selecting a bad location in a capital city still exist—however a long term hold strategy can reduce or eliminate losses if the decision on location was not a great one.

When it comes to regional property—many investors focus on an area for speculative reasons. Perhaps the area is about to undergo a transformation; or perhaps there is talk of a mine contract in the area. Whatever the reason, I always say to investors that a regional area has to have other fundamental reasons to support growth. If the area is reliant on one industry or one contract, the result can be disasterous for the investor if and when the industry or contract finishes up. Some guidelines I work within are population size and growth, local employment diversity, rental reliance of the township, infrastructure/amenities and level of ongoing government funding. If this type of research is not something an investor is prepared to do, I suggest that regional investing is maybe not a good idea for them.

The second objection is often affordability. The answer is simple—a thorough cashflow analysis of the investor’s household income and expenditure can demystify the affordability question. A good cashflow analysis will take into account current spending, future plans and spending, changes to incomes, tax benefits from negative gearing and depreciation and total costs of property ownership. If your lender or broker is unable to provide this help, find one who can. A well thought out purchase enables the investor to hold for the long term, in the face of expenses and changes to incomes over the years. One imperative detail that can’t be overlooked is vacancy rate. Investors need to understand what the vacancy rates are in the areas which they are looking to invest in. Without this information on hand, the cashflow analysis is not reliable and the investor could find themselves in a situation where the costs of ownership are higher than they anticipated based on having periods without rental income.

The third objection I often deal with is in relation to a ‘bad’ tenant. Bad tenant situations do sometimes occur but in most cases they are preventable. A good property manager who follows due processes from the prospective tenant interview stage right through to property inspections and rent collection will be able to provide their landlord a level of confidence in the state of the property and the character of the tenant. The Residential Tenancies Database enables property managers to flag ‘bad’ tenants, and likewise, all diligent property managers will carry out a reference check with past property managers on shortlisted applicants. In the rare and unfortunate cases where a tenant has done the wrong thing, a landlord insurance policy can make a valuable difference.

The last objection I will discuss is reserved for those procrastinators out there who believe that the right time to buy is when property prices collapse. The graph below speaks for itself—don’t wait until values outstrip your budget.

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