4 what could go wrong’s that savvy investors consider before investing
In this article, you’ll learn about assessing if your investment goals are achievable by investing in property – a key consideration when aligning goals, ROI, and risk when you invest in property.
Fail to plan, and you plan to fail
This is an old adage, but one that has held true in all walks of life. The major cause of failure is lack of planning.
If you take a road trip, you know your destination before you leave home. But you must plan your journey to arrive where you want to be when you want to be there. You’ll plot your route, and you’ll consider delays, diversions, road closures, bad weather, and so on. In other words, you plan for the worst, and hope for the best. I suggest you take the same approach to property investment.
Be a realistic dreamer
You dream of a better lifestyle. One in which you get to do what you really want to do, without the inconvenience of the nine-to-five routine. You’ve set your lifestyle goals and quantified them. This has provided you with a number to aim for.
You’ve considered the investment risks. You have a good understanding of how to mitigate those risks when you invest in property. You’ve done your research (or, better still, used Gladfish’s comprehensive property research). You’ve found what appears to be the ideal location to buy a residential property investment opportunity.
Before you go ahead and pull the trigger, you must make sure that you will sleep soundly. You have dreams for the rest of your life. You should be able to sleep well and dream every night. Be a realistic dreamer, and you will avoid a nightmare.
Ask ‘what could go wrong?’
I’m a seasoned property investor, and I always ask what could go wrong with every property that I purchase. By this stage, I’ve already considered the upside. That’s why I’m interested. I know the gross yield is 8%, the expected capital gain is 6% per year, and there is massive infrastructure spending planned. To be honest, I’m not only interested in now, but I’m also ecstatic with excitement.
This is where most beginner investors go wrong. They see all the upside without considering the downside. They jump in with both feet and then realise they’re in the deep end. And the tide is against them. And they don’t have a lifejacket. And they can’t swim.
So, do yourself a favour: always ask what could go wrong. Plan for the worst, and hope for the best.
1. How will it affect you if property prices don’t rise as expected?
One of the dumbest things I hear is ‘property always goes up’. It doesn’t. Over the long term, it should, but there is always the possibility that prices will go down in the short term. It’s all part of the property cycle.
With experience, you’ll be able to make house price predictions throughout the property cycle, and tailor your investment strategy to make money every time you invest. Considering that prices may fall temporarily is part of the art of successful investing.
Property prices may not rise as much as you had expected in the short term. To protect yourself against this, you should attempt to buy below market value. This is just one reason I love investing in off-plan property – we can negotiate some cracking discounts from the country’s best and most reliable property developers. (See our article “How to get the biggest discount on the best off-plan property” for more details.)
When you invest at a discount to market value, you give yourself a cushion against unexpected falls. And the profit on any rise in price is magnified.
2. How will higher mortgage rates affect you?
Now we’re getting to the nitty-gritty of cash flow. Your biggest cost is likely to be your mortgage payments. What if interest rates rise by 1% or 2%? How will this leave your cash flow? Will you be able to adjust your rent to make good the shortfall, or will you have to subsidise your investment from other income?
Factoring in higher interest rates is a good way of staying on the right side of the cash flow equation. But there are also other things you can do to prepare, such as:
- Retaining a cash reserve to pay for a temporary period of negative cash flow, until you can review rents upward, or interest rates fall again.
- Fixing your mortgage rate for two, three, or five years. This will give you the certainty of outgoings, though if interest rates fall you won’t benefit from lower mortgage payments.
3. What if your property requires major repairs?
Another reason I prefer to invest in off-plan and new build property is that I benefit from very low maintenance costs, and also from 10-year building guarantees. Older properties have a nasty habit of becoming money pits – when one thing fails and needs replacing, it’s like a domino topple.
The older your property, the more you should keep as a cash reserve to cover unexpected maintenance bills.
4. What if your buy-to-let won’t let?
Here’s the big question, and answered in a post on Ezytrac’s blog: “My buy-to-let won’t let. What am I doing wrong?” There are only a few reasons your property won’t let:
- Your asking rent is too high
- You are marketing it poorly
- The images on the marketing material are poor
- It’s suffering from ‘tenant turn-offs’ (e.g. it’s smelly, poorly presented, untidy, etc.)
- Your current tenant won’t allow viewings
- The furniture is all wrong
Most of these are correctable. But you should allow for void periods in your calculations. I always allow for a one-month void period each year when I’m calculating my projected cash flow. I then make sure my cash reserve is large enough to cover my costs while no rent is coming in. When it turns out I haven’t suffered a void period during the year, it’s a little like receiving a bonus!
Now, how do your ROI forecasts look?
Taking these four ‘what could go wrong’s into consideration will cast a different light on your investment opportunity. They will tell you how to prepare for the worst so that the opportunity has more chance of producing the best.
Always, always go through these questions and downside scenarios before investing. Often, the numbers will still stack up, especially if you act to mitigate the risks of your investment property not performing as well as expected. But now and again, they won’t. Don’t try to force them to. Walk away. Sleep easy at night, knowing that there’s a better opportunity for you on its way.
In my next article in this series, I’ll discuss how to pump up your profits from property investment by acting like a professional. In the meantime, if you’d like to discuss your lifestyle goals and how property investment could help you achieve them while you sleep easily, book a property investment strategy consultation by contacting Gladfish today on +44 207 923 6100.
Live with passion and fun,
Brett Alegre-Wood
