Rental Property Cashflow and Risk

Managing Risk

Property is Like Any Other Investment - It Can Go Up as Well as Down.

Not buying can actually be a bigger risk than buying - but evidence shows that if you buy well your risk is dramatically reduced.

We love buying properties and have made a great deal of money by buying the right properties, at the right price, at the right time. But for those people who are either unlucky or don’t carry out fundamental research, buying property can provide the potential for greater risk, and even loss.

St Kilda West: 22 Park: Great day for an Auction: Well we thought so but nobody else did: Passed In
St Kilda West: 22 Park: Great day for an Auction: Well we thought so but nobody else did: Passed In

Our philosophy is that you need to take on a certain amount of risk when buying property. The trick is to reduce that risk by understanding the pitfalls, doing the right research, and following a logical system such as Property Ratings.

Historically, the higher the value of the property, the greater the short term fluctuations in market value. Therefore while we all buy property in the hope it will go up - often it doesn’t, especially in the short term. But it’s a proven fact that quality property will always performs very well as an investment in the long term.

What Are Some Of Our Tips on Reducing Risk?

Remember That the Market Fluctuations Do Happen - But That the Risk Reduces If You Buy Well, and Hold The Property For a Long Time

What happens if it's not the right place and you have to sell again in two years? An average Melbourne home in a good suburb will cost you $50,000 to $100,000 in stamp duty and agent fees, not to mention the cost of moving and stress.

If You Are Buying Property as an Investment, Don’t Take Agents’ Rental Estimates as Gospel - and Put in Place a Cash Flow Buffer.

When requested, we obtain rental estimates from the agent - but these estimates are just that - estimates from the agents, not guarantees. Nobody guarantees that you will be able to rent the property at a specific price or within a certain time frame. You should allow for times when the property is untenanted, a buffer for repairs and interest rate increases. Be conservative in what you can afford.

Detailed Research Reduces Risk in Buying Property.

The general market information available on property is not always accurate and is never fully complete, so please understand there are risks on relying on one piece of information. We use multiple research vehicles to arrive at our recommendations - many of which are not available to the general public.

Keep in Mind That Property Valuations Are never Guaranteed and Do Vary

Our estimates and other figures are just that - estimates. They are based on research but may differ considerably from a bank valuation, which could mean a loan may not be approved. To protect yourself against this, we can arrange an additional independent valuation (cost between $600-$2500). We also suggest you allow a significant buffer in declining markets and on certain properties, especially if another property transaction is being calculated into your figures - for example, you are also selling. If you are not sure, talk to us as well as your accountant.

If You Negotiate Low, There's Always Risk You Will Miss Out On a Property

Generally speaking, the harder we negotiate and the lower the offer on a good property, the greater the risk that another buyer will purchase. At all times you need to balance the price offered, against the risk of missing out.

Development Poses Additional Risks For All Property Buyers

If you are buying a vacant block of land or planning to carry out major renovations, your purchase does carry additional risk. For example, your plans may well be subject to council approval (STCA); you may experience delays and associated holding costs; not be able to do what you wanted to do without modifications; or not be able to do what you wanted to do full stop. We strongly recommend that you contact your council (we can supply numbers) to ascertain if what you want to do will be allowed. You should take notes of all your conversations and record names and dates.

We at James Buyer Advocates do not do this as we are not privy to your plans in full and even where we are privy, we are not qualified to give specific building and/or town planning advice. If you do not wish to do this yourself then we strongly recommend your architect, who should be selected and consulted prior to purchase, make the necessary enquiries on your behalf. We can provide you with names of architects or simply contact the Royal Australian Institute of Architects

If you feel it is more appropriate, you could engage a professional town planner for advice prior to purchase. We can supply names - for example, Peter Small at Urbis who is used a lot by our clients, or click on the town planners website and go to the 'contact us’ section for your nearest town planner.

Neighbours Also Pose Development Risks for Property Buyers

It is not possible to ascertain what all your future neighbours may be planning in terms of building or developing. Your solicitor checks your Section 32’s for anything declared by the vendor and you can make your own enquiry at council. However that may not give you all the answers. When you have views that can be built out, or large parcels of vacant land, or large parcels of land owned by the one entity within your immediate amenity, you need to weigh up carefully the risks you are taking in purchasing.

Reduce Your Risk by Undertaking Proper Pest and Building Inspections

In Victoria, it is a case of "buyer beware". We are buying the property as is and often there are many faults to the property. Occasionally, these problems can be major. To reduce the chances of unknown problems, we always recommend Pest and Building Inspections and prior checking of legal documents for caveats, covenants, easements, title deficiencies and more.

Protecting Your Assets is Critical

In property, we cannot afford to lose our asset base. While gearing, debt and rents are all wonderful things, if you lose your asset base you are in trouble. Things do not always go to plan. So put in place proper insurance from the start, like Life, Disability, Property, Business Interruption/Income and Landlords/Tenants insurance. The risk always reduces if you have adequate insurance.

Investing in Property is About Buying Time, Not Just Real Estate

Some experts say the market is going up and some say it is going down. Property does go up and down in the short term. Sometimes it’s because of artificial interference from governments via the manipulation of interest rates, or first home buyer grants, rent controls or tax concessions, but often it’s the natural market forces of supply and demand.

The bottom line for us at James Buyer Advocates is that they have stopped making land in the good suburbs. As demand exceeds supply near good schools, trains, the beach and the central business district, then so too will the price go up under competition. Good property will always continue to rise through demand linked to economic improvements, increased wealth and net migration.

Debt Risk Reduces If You Have a Buffer and Get Good Financial Advice

Most good property investing involves borrowing money. Good returns can turn into spectacular returns by borrowing money. But debt also creates additional risks. For instance, in the early 1990’s, interest rates were over double what they are now (up to 18%). Gearing basically means the level of payment required to service your debt. If you have a heavy level of negative gearing and you do not manage it well, then your lifestyle will be affected. You need to understand and manage this to reduce the risk of poor purchases (too heavily geared) or poor sales (good property that you tire of and sell because of the payments. On the flip side, not investing will also affect your lifestyle in the future. Positive gearing is fine, provided it is associated with the prospect of growth.

How do James handle conflicts?

It is a conflict where we have two clients who become interested in the same property. This does occasionally happen as we deal with a lot in investors and some of our owner occupier clients change their YOUR NEEDS profile. Our solution to this difficult issue is openness :

Click here to read our full conflict management process

To Reduce Risk, We Recommend You

  1. Seek the correct financial advice
  2. Have the correct structure and insurances in place
  3. Have a clear plan as to why you are buying or selling
  4. Search all your options, not just a few
  5. Always visit the property if possible and look at the whole area and neighbours
  6. Buy conservatively with regards to initial capital outlay and ongoing interest rates
  7. Have a buffer
  8. Understand there are upsides and downsides
  9. Prepare to hold for a lengthy period - preferably at least one full cycle
  10. Develop intelligently and do not overcapitalise (we can help)
  11. Speak to your bank and have the OK on finances
  12. Research and assess via our Ratings and Report systems
  13. Get a solicitor to review the Section 32’s
  14. Get Building and Pest Control Inspections
  15. Contact the council with regards to building and neighbours

Use a buyers agent or at the very least an independent valuer to reduce your risk when negotiating with a selling agent: NEGOTIATE

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