The Risks in Property Investment

Yes, there are risks!
Despite the highly promising scenario outlined in the previous
chapters, things can go wrong and undoubtedly will in the course
of your investment. Here are some of the most likely.

PRICE FALLS
Nobody likes to think of house prices falling, particularly if there
has been a sustained period of above-average rises and we have
been lulled into believing it will always be like this. Unfortunately,
however, prices do fall (and are more likely to do so after a
sustained period of above-average rises). How does this affect the
market?
With regards to the reduced value of a property portfolio, this
should not worry the investor seriously. Property investment is for
the long term. Prices can be expected to fluctuate. It is the longterm
gain that matters. In addition, it is normally not possible to
borrow more than 85% of the property’s value, so the risk of
negative equity (where you owe more than the property is worth)
is slight. But what about the rental market?
When prices start to fall it might be expected that more people
will decide to buy. This is not so. They decide to wait! Nobody,
after all, wants to buy now when prices may have much further to
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fall. As a result, the decision to buy is put off. In the meantime,
would-be purchasers rent.
While first-time buyers delay their purchase, so do many investors,
and for the same reason. This, too, affects the rental market
because fewer properties become available to let. There is,
therefore, both a reduced supply of and an increased demand for
rental accommodation. The net effect is to improve considerably the
lot of the landlord. It is easier to find tenants and easier to review
rents upwards when tenancy agreements are due for renewal.

PRICE RISES
Price rises are more serious problem for the rental market. The
perception of ever increasing price rises attracts the wrong sort of
investor – the short-term, capital gain speculator. The difficulty
here is that, while the speculator is waiting for his capital gain, he
lets his property. This has the effect of increasing the supply of
rented accommodation and temporarily depressing rents.
The investor who has bought the right sort of property in the
right area and with a view to the long term will not be greatly
affected by this. Such an investor can wait for the market to turn.
When prices reach their peak, the speculators will go and sanity
will return. Unfortunately, as we shall see, the less careful investor
could well suffer in the meantime.
INTEREST RATE RISES
We are all at the mercy of mortgage rate fluctuations. While the
occasional quarter point rise will make little difference, a
succession of such increases will hurt. But will they cause serious
damage?

T H E R I S K S

Buy-to-let lenders are a canny lot and have already thought of
this. As we shall see, such mortgages are based on an independent
estimate of the rental income. In addition, most prudent lenders
insist that the rent should be 125% or 130% of the monthly
mortgage cost. By protecting themselves in this way, mortgage
lenders are also protecting their customers.
VOIDS
An ugly term to describe periods when a property is without
tenants.
It is sensible to expect some periods during which a property will
not be let. One month in 12 is a good rule of thumb. The simple
way to deal with voids is to plan ahead and anticipate a rental
income for no more than 11 months a year.
As for the property itself, there is the risk that if it is empty for a
prolonged period of time it may attract squatters. It will need to
be watched carefully. There is also the matter of building
insurance. If the property is empty for more than a specified time
(anywhere between one month and three), the insurer may not pay
out in the event of a claim. Check the policy schedule and advise
the insurer of any change of circumstances that might affect a
claim.