If there is one thing that always rings true about investing in real estate, it’s this: regardless of where you invest, what type of property you buy, and what kind of market you’re buying in, property investing comes with inherent risks attached. Period!
That said, there are definitely things you can do to minimize the risk of something going wrong.
So what are some of the imminent risks for investors in the current market, and how you can prepare for them?
CLEAR AND PRESENT DANGER
The first step is to work out exactly what risks you could potentially face. In my view, three immediate risks spring to mind:
Relying onrest rate low intes
Interest rates will always go up and down. My advice is to enjoy interest rates while they are low now, but also factor in rates of up to three per cent or even five per cent to ‘stress test’ your loans, to see how you’d cope with higher rates in place. This will help you ensure you can afford your investment property now and in the future. Also, having a buffer in place will help you ride out any financial turbulence if interest rates do start trending upwards.
Investing without a clear strategy
In my view, buying property without a clear investment strategy in place is one of the biggest risks an investor can take and, unfortunately, this is what many Canadians do on a daily basis.
It’s important for investors to devise and implement their own personalized property investment strategy, one that matches both their immediate and long-term goals, and their present lifestyle needs. There’s no point in living from pay cheque to pay cheque and sacrificing your current lifestyle in order to financially manage your property portfolio while you create wealth for your future. There is a better way to invest, and it starts with you creating an honest picture of where you stand financially right now, and where you hope to be in five, 10, 15 and 20 years.
Without this kind of investment strategy and financial road map in place, you’re effectively gambling, as it’s impossible for you to make clear, smart investment decisions that take you towards your goal. After all, how can you reach your goals if you don’t even know what they are?
HOW DO YOU ENSURE YOU DON’T FACE THESE RISKS IN THE FIRST PLACE?
Research, research and more research. Regardless of the market, but especially right now, the best way to protect yourself from the risks associated with property investing is to arm yourself with as much information as possible, so that you can make the smartest, most informed decisions you can.
IF YOU’RE AT RISK, WHAT CAN YOU DO NOW TO LESSEN THE DAMAGE?
Let’s say you own an investment property and you’re at risk of things turning pear-shaped. Perhaps you overextended yourself financially, or you’ve run into trouble with dodgy tenants. Whatever the problem, there is always a potential solution. For instance, you could:
Reinforce your finances
If you are facing financial difficulties for a particular reason, such as a prolonged tenant vacancy, then you need some funds to help you manage the situation at hand. My advice would be to immediately focus on creating a buffer account.
At the same time, make a serious and concerted effort to pay down any ‘bad debts’ such as credit cards, as they chew through your disposable income and divert precious funds and resources away from your investing pursuits.
Ultimately, if you do not have a tenant, you want to do what you can to get a tenant in place to ensure you have some rent coming in so that you are not having to fund the full mortgage repayment each month.
Get your head out of the sand
Often when a situation is turning negative, we may avoid facing up to it – and this can be a very costly mistake to make. I’ve seen many investors who have needlessly gone to the wall financially, often because they didn’t face their financial woes early enough. The sooner you take a proactive approach, the sooner you can put the right steps in place to turn your situation around. If necessary, seek help A trusted property mentor, a friend in the industry, a colleague who knows property inside out – turn to those people you know and trust for advice, as they will be able to help you review your situation from a clear, unbiased and objective place. Importantly, they can then help you strategize how to move forward in a positive way.
Remember, there will always be new opportunities to create wealth through real estate, and by having a clear strategy and a flexible, honest approach, you place yourself in the best possible position for property success.