Are you considering an investment property? Have you thought about risk?
Monday, 7 April 2014 12:00 AM
Being an accountant I see a lot of clients who want to understand more about buying a investment properties.
I see clients focusing on the current tax benefits or future capital growth. Unfortunately I rarely see them focusing on the risks associated with buying a property.
My advise to them is to try not to start with where you want to buy or what you want it to look like.
Instead focus your time on educating yourself on the potential risks involved and doing your research.
Two discussions that I have with my clients before we talk about the property are:
Who is buying the property and why?
What are the potential risks and how they can be minimised?
Below is a simple table that outlines the common structures that can be used to purchase an investment property.
When considering which structure to purchase a property in, I look at a clients personal situation and ask the following questions:
Do you have a spouse and/or children?
Are you currently renting, do they have a house or looking to buy one in the future?
Do they have their own business?
How safe is your job?
How much income do you earn?
What is your disposable income?
What do you want out of the property, income or growth?
When asking my clients why they want to invest in property I never get the same answer.
One client that comes to mind entered into a contract before considering any of the questions above. I asked them why they had decided to buy that property, and they said that ‘one of their mates said that I was paying too much tax and that I need to buy a rental property’.
I ended up sitting with them to discuss their situation and we decided that at this time a rental property was not for them.
You really need to ask yourself – Why are you buying a rental property? Is it because someone told you too, to save on tax or make a big profit when you sell?
The answer to the ‘WHY’ question will determine which structure is most suited to your personal circumstances and which investment strategy you should take.
When it comes to buying a property, there are always risks that you can control and risk you cannot. You will need to identify these potential risks and then work out ways to remove or minimise these risks.
If we look at common risks like losing your job or being unable to work due to injury or sickness, these can result in reduced cash flow and an inability to put money towards the running costs of the property.These risks can be controlled by having income protection insurance and saving an adequate emergency fund.
Other risks associated with buying an investment property can include, but are not limited to:
You have no tenant for a few months
Interest rates double
You get divorced
You discover termites in the walls
The tenant destroys the property
You find out the government wants to put a highway out the front of your house.
When it comes to risk, some can be controlled and others can be avoided by doing your homework before you buy your property.
In my eyes the best property is the one with the highest return for the lowest risk.
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