Putting money into property is seen by many as a smart decision, but what are the risks of buying an investment property?
Naturally, there will be risks involved in almost anything in the world of real estate and property investments.
Before we dive deep into things, we need to rewind it all and start at the beginning with a simple question.
What Is An Investment Property?
As per Investopedia, an investment property can be defined as follows:
A real estate property that has been purchased with the intention of earning a return on the investment, either through rental income, the future resale of the property, or both.
So, in short, it’s a property you buy with the sole intention to make money from and earn a good ROI (Return On Investment).
With an investment property, you will usually live elsewhere and just control this asset to generate some cash.
Is Property A Good Investment?
Investing in property is far from a new concept, but is it a good idea? The quick answer to this is yes, in most cases it is.
Many people have proved that investment properties are excellent at generating excellent returns on your initial investment.
They come with a whole host of advantages that really make it seem like a tantalising prospect.
House Prices Tend To Rise
You don’t have to be a property market expert to know that house prices tend to rise if given enough time. If you bought a house now, then it would be considerably more expensive than if you bought it ten years ago.
The market value has regularly increased with time, which means there’s always the potential to make a profit.
Multiple Ways Of Making Money
As mentioned in the definition, an investment property can generate money in three different ways. You can earn rental income, sell the property for a profit (by flipping it), or do both.
This keeps your options open, meaning you can make a steady income or a lump sum of cash depending on your needs.
Easy To Invest In
Another significant advantage of property is that it’s easy for most people to invest in.
This is largely thanks to mortgages, which allow you to put a small deposit down and then purchase a home.
In general, property is a good investment. However, it all depends on the property you invest in and how you look to make money.
What Are The Risks Of Property Investment?
Now, we move onto the central part of this article; what are the risks of buying an investment property?
Despite all the pros, there are always cons to consider too…
Investing in a property that’s situated in a bad location can present a pretty substantial risk.
Regardless of whether you’re looking to make rental income or flip it for a profit, this plays a significant role in the desirability of your property.
If it’s in a location that people don’t really want to live in, then you’ll struggle to find anyone willing to buy or rent it.
It’s also easy to get sucked in by a property in a bad location as the price tends to be lower because it’s not a popular location.
Condition Of The Property
There’s also a sizeable risk revolving around the state of the investment property. Houses in terrible conditions are cheap, but they require a lot of work.
This could end up costing more than you anticipated, meaning it’s tough to sell the home for a profit.
Likewise, you may have to wait a very long time before making a profit from rental income because it cost so much to improve the home and get it in a condition worth renting.
Next up, you have to think about the current market conditions at all times. If the property market is doing well, then you usually see a great deal of success.
It’s easy to sell your property for a profit, and you will find plenty of tenants wanting to rent your house.
But, when market conditions are bad, people are reluctant to buy homes, meaning it’s hard to earn a profit from a resale.
If your investment property is set up to earn rental income, then there are risks associated with the tenants.
You may get some that don’t pay rent on time, which leads to a whole host of potentially costly legal implications. It could be months before you see the money you’re entitled to.
Risks Of Commercial Property Investment
You can also invest in commercial property, which is basically any property used for commercial purposes – such as an office, retail store, etc.
If you’re thinking about this, then there are a few commercial property investment risks to know about as well:
Selecting The Right Property
There are loads of different commercial property types out there, which means it can be hard choosing the right one.
How will you know whether a warehouse or office generates the highest return? The best thing to do is carry out plenty of research while talking to commercial property experts.
With investment properties, your tenants will all be businesses.
As such, there’s every chance a company can close pretty quickly, leaving you with a vacancy and no means of making money.
What’s more, if lots of businesses are closing in the same area, it can be very hard to try and find another company to move in and start paying rent.
Along with these things, you also have the general investment property risks to worry about as well.
How Do You Buy An Investment Property?
After looking at the risks of buying an investment property, and weighing them up against the advantages, you may want to give it a go. So, how do you buy an investment property?
Mainly, it’s the same as buying a home in that you can use your own funds or apply for a mortgage.
So, the best thing to do is save up for a mortgage deposit and consult with a mortgage advisor to find the best deals available.
Then, you need to seek out the ideal investment property by considering the location, state of the property, value, and your intentions for the investment.
We recommend that you do plenty of research into everything surrounding investment properties.
Find the best savings accounts to save up for your deposit, then find the best mortgage provider to make the purchase.
Of course, don’t forget to spend lots of time finding the perfect property to invest in – even if this means you have to be patient and wait for the right opportunity!