The ACQUISITIONS RISK refers to the risk of buying the ‘right property’! The factors to consider include the health of the economy generally and the phase of the property cycle for a particular area. Demograhics,acquisition
including baseline population figures and forecast growth, typical family compositions matching property types and above average household incomes and employment rates all contribute positively to the balance of evidence to support a choice. Vacancy rates and the demand for accommodation, alongside the supply of property now and planned as well as local infrastructure should also be examined. Due diligence, with the assistance of expert advice makes it more likely to hone in on ‘above average opportunities’ in the market.
2. FINANCIAL RISK is contingent on your ability to sustain the investment for the long term. Remember that property is nor a “get rich quick scheme”, time is more important than split second timing!
Any decision you make must be sustainable for the long term and so the bottom line out of pocket costs should be kept within a range that doesn’t become a stressful or unmanageable burden. It’s important not to “bite off more than you can chew”!
We have talked before about having a team of experts and qualified, professional tax advice is important. Tax should not and can not legally be avoided in Australia but it can be minimized! Having good advice about ownership splits and structures will allow you to minimize your tax burden and to maximize your rebates.
The availability of credit will also vary from time to time depending on prudential regulation, monetary policy, national savings levels, consumer’s propensity to consume and more. Particularly when purchasing off plan, with a delay between committing and settlement, lending criteria can change. Again this reinforces the advice that building in a contingency for the unforseen is wise and not committing right to the limit of your borrowing capacity. Insuring the property against damage or loss of rent is crucial and is an allowable, deductible cost of ownership.
3. MANAGEMENT RISK is concerned with will my asset be looked after?! Australia is a large country and as we have also seen there is no one property market. There are opportunities across this big country, far and wide.
The correct investor mindset makes decision based on the balance of evidence and therefore the target area may be outside your immediate reach. As an investor, particularly as your portfolio grows, you can’t be “looking over the bank fence”. Most of us are too time poor, specializing in our own jobs and areas of expertise to be self managing a property portfolio. Sourcing, vetting and managing the tenant is a specialist Property Manager’s role.
Finding a tried and proven Property Manager, based on recommendation and experience is important. Keeping tenants and minimizing turnover and having them care for your property is also encouraged by being a fair and responsive landlord. Tenants have a right to expect that the property they are paying for is in good order and everything is working as it should. prompt attention to any repairs/ requests usually pays dividends in terms of keeping quality tenants.
Of course it’s not unheard of to suffer damage or rent arrears or default and so Landlord Protection, building and contents insurance are strongly advised.
4. Exit Risk can be mitigated through timing and carefully researched, property selection from the start. Some investors have no intention of cashing in their investments and rather choose to live off the proceeds of the capital, rather than the capital itself. This may be the case if they have built up a sufficiently large portfolio to support themselves and may wish to bequeath their assets to their children or others.
If the intention and decision to exit is made, it may be a partial divestment (one property at a time, or a portion of their assets) or it may be all at once. As their is no one property market, some in growth phases and others not, it is more likely and sensible that a diversified portfolio is sold off at the right point in the property cycle for each property. If proper due diligence has been conducted initially, appropriate properties that maximise market share will have been chosen and so the market on resale is also optimized.
When it comes to Capital Gains Tax payable, a qualified and experienced accountant can advise you how to reduce your obligation. CGT is charged at your top marginal rate and so timing the sale of property in a financial year in which your earnings are lower may be advisable.