Investment properties is one of the most common types of investments. It takes many forms such as buying a house to live in or let out but you should be aware of the potential risks involved to invest in correct way.
There are two main potential returns with property which are:
- Rent – you can let out property to tenants and earn an income.
- Selling for a profit – you can buy property and later sell it at a higher price.
You even do not need to buy a property yourself, and have potential benefits indirectly by investing in a property fund that invests directly in property.
You can also invest through property maintenance and management services.
Potential risks of property investing
Property prices and demand for rentals go up and down. That’s why direct and indirect property investments are for the long term. If you’re willing to wait, you can ride out the losses when market is down and earn profits again when times are better.
If you’re over-invested in property or if most of your money is tied up in a buy-to-let property, you may end up in trouble when housing markets slow. To avoid this, you should diversify your portfolio and investing in different sectors.
Buying property directly – what to watch out for
There can be several potential risks when you buy property directly or as a buy-to-let investment.
- You can’t get your money out quickly. Property is a long-term investment and it takes a long time to sell property.
- It’s a big commitment. When you buy a property, you’re putting doing much more than other forms of investments and putting a lot of eggs in a single basket.
- There are buying and selling costs, costs with estate agent and surveyor fees, stamp duty, land tax, solicitors’ and conveyancing fee.
- It’s demanding – maintenance work and managing property involves time, money and effort. If you don’t own the freehold outright then you may need to extend the lease. This is another cost, has to be negotiated and is time-consuming.
If you use a mortgage or a loan to buy property, additional risks are involved:
- There’s no guarantee you’ll earn enough rent to cover loan repayments.
- The cost of the mortgage might rise.
- If you don’t keep up with repayments, the bank or building society can take back the property.
Investing in property indirectly through a fund
With a pooled (or collective) property fund, a professional manager collects money from many investors and invests the money directly in property or in property shares. Fund managers charge a fee for this service, which will affect your earnings.
Some common examples of property funds:
- Real estate investment trusts (REITs).
- Shares in listed property companies.
- Property investment trusts.
- Insurance company property funds.
- Property unit trusts.
- Offshore property companies.
What to do before investing in property?
Before making any decision to invest in property you should undertake thorough research and gather as much information as possible. You should find the pros and cons or consult an expert. You can even look at other possibilities of investment which might serve your purpose better and, only once you are convinced, should you proceed with your property investment plans.