What are the Risks of investing in Residential Property

We can all get really excited about the prospects of creating a great passive income out of property. But one of the big things when we look at 2014 and we see all the hype around property investment is there’s still actual risk involved in investing in property. So today I wanted to share a moment with you in this time and talk about the risks that are involved in this type of activity. The first one is legislation risk.

Now when I talk about legislation risk, what I’m talking about is what are the governments doing in terms of controlling the marketplace. They control the game. They can introduce changes to tax legislation. They can introduce changes into planning guidelines and that is a risk element. So we need to understand that that risk is there. In saying that, that shouldn’t paralyze us but we just need to know that it is there.

The second risk is gearing risk. So the way in which you’re able to accelerate your wealth outcome in property is to obviously get leverage into the conversation. Now when you get leverage into the conversation, that’s giving you gearing risk. Now when you’re doing that, you just need to understand that you’re taking on more debt.

It’s absolutely imperative that you understand your cash flows and your ability to be able to afford that debt both today and tomorrow in any of the changes that may be happening in your household, relating to those.

The other big risk is obviously value risk and I call this general market risk. This is the supply-demand conversation. So if we say value is growing over a period of time because we’ve got a shortfall, will those values exceed the market valuation or the equilibrium in the market once things cool down? So we need to understand the supply and demand drivers and this is the value risk.

Obviously once we’ve secured a property, we need to talk about tenancy risk. Tenancy risk is obviously, “What are they going to do to our assets?” Are they going to look after our assets? Are they going to trash our assets? So there is definitely tenancy risk and a lot of the people that I’ve talked to over my journey of advising hundreds of people around this type of thing is they tend to get a bit scared by that. So that’s an important thing to understand.

The final thing is liquidity risk. Now liquidity risk is basically what’s happening in terms of interest rates and again that cash flow conversation, so the money coming into your household, the rent coming in on that property. If the property is not rented, how are you going to be able to afford that? So that’s the liquidity risk.

It’s really important to think about these types of things. A lot of people are going to tell you about the great things that are involved in property investment and the great outcomes you can achieve. But the reality is there are still risks involved and this video is all about understanding those.

So let’s summarize what we’ve just talked about from a risk perspective when it comes to investing in residential property. There are five main ones – legislation risk, gearing risk, general market or what I call value risk, tenancy risk and liquidity risk. All really, really important considerations.

In my next how-to video session, I’m going to share with you ways in which we can mitigate that risk and I want to talk to you about defence strategies as part of how you build the perfect property portfolio plan.

Thanks for watching.