Investing in buy-to-let property offers both regular income and capital growth potential, but like any investment it’s not without its pitfalls.
There is certainly no guarantee of increased rental income or a rise in the property’s value over time – add to that the hassle factors of property administration, maintenance and repairs, downtime between tenants and the possibility of bad tenants – and the picture starts to become less appealing!
If you choose to manage the property yourself, a buy-to-let property can be really hard work, so much so that it’s almost like having a second part-time job. Depending on the size of the property, there can be a never ending list of chores, bills to be paid and maintenance items to be attended to. If the property is not close to your home or place of work, a considerable amount of time and travel costs need to be factored in – bear in mind that a simple repair job could take up to 3 visits – one for the quotation, a second for access to carry out the repair and a third for inspection and sign off. The answer is to appoint a good property management company, which can take away the hassle and frustration, but at an additional cost that needs to be factored in.
Despite all your best laid plans, unexpected costs do have a habit of creeping in. It’s a good idea to build up an emergency fund for unforeseen expenses. Tenants expect (and rightly so) the property to be maintained appropriately.
Tenants and rentals are also subject to the forces of supply and demand
It is a fact of life that all investments are cyclical and are affected by changing market forces. Hence the inherent risk. Research and identify your location. Think about your potential tenants, the areas they are likely to want to rent and the proximity to public transport services, shopping malls and other facilities. Property websites track the sale price of properties per suburb over long periods of time so you can spot trends. The golden rules of investment apply – buy after a downturn and take advantage of the up-cycle for capital growth.
The amount of time taken between leases to find good tenants can be frustrating and costly. One month standing empty is equal to an 8.3% reduction in rental! Downtime is expensive. Stagnant rentals can also be a problem during periods of economic hardship and may require you to supplement the rental income to cover all the costs if you cannot increase the rent.
Consider the worst case scenario – buying at the top of the market (when prices are high), realising 10% less rental than anticipated and having more downtime than you expected. If the figures still work, then the investment property you are contemplating definitely seems appealing.
Another factor is that in a buy-to-let property, your capital is not at all liquid, so you should be prepared for a lengthy commitment. This can of course be an advantage if your investment goal is retirement or wealth appreciation over the longer term, as it’s impossible to dip into your savings along the way. However, selling a property can take months or even years, especially if you are waiting for the property market to improve.
Spread Your Investment Risk As always, diversity is key. Structure your retirement or investments around several money makers; equities, unit trust investments and property. Furthermore, a listed property fund offers an attractive and more diversified alternative for those who want exposure to property without the hassles of owning the property and managing the tenants. Moreover, for a small investor, a single buy-to-let property represents a very large concentration of risk, because a great deal of money is invested in a single asset. Granted, the share market can be volatile, but by buying into a property fund the risk is spread over a number of properties.
Real Estate Investment Trusts, known as REITS (listed property companies) have been the best performing asset class over the last 10 years and they are extremely liquid and well diversified.
Submitted October 16, 2017 at 10:37AM by Rutherford_Capital http://ift.tt/2zcl7Fq
