Property investment is a good way to create wealth because of its long history of solid performance. It is often low risk but you still have to remember that every investment opportunity comes with an element of risk.
The Reserve Bank has maintained the cash rate at 1.5% since 2016. However, investors had to deal with higher interest rates because of APRA’s lending restrictions. This means it is likely that interest rates will further increase and the risk is not being able to meet the repayment of your loan. What you can do is have a cash buffer that you can access in case interest rates increase. You can also lock in part or all of your loan to a fixed interest rate to avoid the risk of increasing rates.
Another risk is the property market crash. While many people predict a housing market crash, it still remains unlikely in capital city markets. Even if house prices have slowed down in Sydney, it is not expected to crash soon because of all its new jobs, buoyant economy and infrastructure spending. To manage risk, it may be a good idea to buy investment grade properties, which have always outperformed averages and will always be in strong demand from affluent owner-occupiers. You may also build your equity by purchasing under intrinsic value or manufacture it through renovation to reduce your risk exposure.
Meanwhile, there is also the risk of not being able to offload an asset when you have to because of an under-performing asset or of changing financial circumstances. There is a liquidity risk especially in the oversupply of new unit stock in some part of Australia’s major capital cities. The demand has reduced so much that investors have to take a substantial loss if they sell and have a hard time looking for a buyer. To avoid this risk, you may have to purchase properties in locations with enough market depth, many buyers and enough properties turning over to ensure a liquid market.
It is also a risk to hold on to an under-performing asset. If you wish you had not bought the property, it may be time to sell it so you can invest in a better performing asset. You might be missing out on an opportunity if you hold on to an under-performing property for too long.
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