Property Investment Tips: Risks in the Horizon

With historically low interest rates, the environment in Australia for property investment has been prosperous for many investors over the past 5 years. There is also increasing competition among lenders, many of which are trying to gain marketing share by offering competitive rates. At Rate Detective, we have access to more than 30 lenders and can find you the most competitive lender from our panel of lenders.

According to the Australian Bureau of Statistics, although Investment Lending for Homes have gone down by 0.8 per cent in March compared to the previous month, it has actually been on a steady rise over the past several months. In February, for example, it has grown by 4.4 per cent.

However, smart investors -- especially those in it for the long haul -- understand that trends like these don’t last forever. Once the economy picks up, the RBA will start raising rates again. And while the consensus is that it won’t happen in the short-term, it helps to be aware of the risks in the horizon and avoid these while there is still time. These risks include:

1. Increase in interest rates. Investors expect the RBA to start raising rates by the second half of 2015. Although the increases will likely be gradual, the cost of borrowing is likely to increase from current levels. An increase of several per cent could translate to several thousands of dollars in additional interest payments. So when considering how much you can afford to borrow, factor in likely rate rises in your calculations.

2. Not enough demand. Although there continues to be a shortage in dwellings across the country, the risk for investors is buying in an area with no real rental demand in that geographical location.  This could lead to significant cash flow issues with long periods of your investment property being untenanted. It pays to check historic rental rates before buying for this reason.   

3. “Irrational exuberance”. The term was coined by former US Fed Chairman Alan Greenspan in his 1996 speech, “The Challenge of Central Banking in a Democratic Society”. This happens when the increase in the value of assets -- in this case, properties -- only go up due to the enthusiasm by investors and without any support of fundamentals. This could lead to overpriced properties, which could then drop in value dramatically once the market corrects itself, i.e. finds a stable price point where buyers are willing to purchase assets.

How to Avoid These Risks

Here are a number of ways you could avoid or lessen the impact of the risks we mentioned above:

1. Do your research. This will always be key to lessening your risk when you are an investor. Before you purchase a property and choose a location where you want to invest, always make sure that you understand where there is adequate demand for properties and what type of property usually sell there.

You could refer to property magazines and reports to aid your research. In addition to figures, you’d also want information from locals there, so a local real estate agent would be able to help you. It’s also important that you go to the area to see for yourself if it is an ideal place to invest in.

2. ‘Stress test’ your finances. Before purchasing your property you should consider whether you can make repayments should a rates go up, say, to 7 per cent. If you can’t pass the stress test, there are other options available. Check our home loan repayment calculator in our calculators section to do this stress test.

3. Refinance your loan. Refinancing is a popular option among those who want to get a mortgage that is better suited to their needs. There are often more cost effective options outside of the major banks and banks are constantly changing their rates as well. A Rate Detective Broker can help discuss this option, and our service is cost and obligation free.

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Published on June 6-th, 2014 in Property Investment
Damon Rasheed is the CEO of Rate Detective, an Australian financial service comparison sites specialising in Life Insurance, Income Protection Insurance and home loans. Damon holds a Master's Degree in Economics from the University of Melbourne and has been involved in many start-up internet businesses.
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