Risks in Investing in Property

When investing in property in our experience there has never been a property which is 100% void of risks. In addition there are no concrete rules, instead you have to balance out the possibilities and likely hood of particular investments and the risks involved. At best we can only apply “rules of thumb”.

Off-plan

With off-plan the number 1 risk is the construction phase. A lot of off-plan investments require investors to buy off-plan to fund the build, though this is not always the case. The construction phase itself is very labour intensive and a lot can go wrong in terms of construction delay.

What can you do to reduce these risks

  1. The best way to off-set this risk is by looking at the developer. A reputable developer with plenty of successful projects and a strong track record is unlikely to let you down during construction. 
  2. Research the developer on Companies House and see profitability over the last few years
  3. Search and read reviews of developer and connected construction companies
  4. A general google search will highlight all the major points of a developer and will bring up bad press
  5. Check the sale price of the properties in comparison to other new builds in the area
  6. Go to the location and see the site for yourself, where construction may have started

New build

A new build property in theory should be able to avoid the risks that off-plan and the second-hand market mostly encounter with construction issues and property conditions. However, risks are still there.

  • Build quality in recent years have arisen a lot with new developments, and buyers are having to have issues fixed after purchase. 
  • A new build will typically be more expensive in comparison to an off-plan or second-hand property needing work, this higher valuation will have an affect on the yield that can be achieved.

What can you do to reduce these risks

  1. New builds in the UK now all come with a 10-year build warranty, make sure you utilise this to its max.
  2. Any issues you do spot make sure the developer knows about it as quickly as possible. The longer you leave it the more likely the issue may be blamed on you or your tenant.
  3. Know what your yield is going to be and accept it may be lower than off-plan or second-hand

Second hand market

The second-hand market for property main risks are centred around the condition of the property itself, and there could be many issues that can either prevent you from getting a BTL mortgage or cost you way to much to fix, making the investment a loss. Examples of some issues to look out for

  • Subsidence (this could be a big one and cost a lot to repair, look out for large cracks)
  • Leaking roof (wet patches and damp on top level ceilings)
  • Rising Damp (damp walls on the ground floor)
  • Japanese knotweed (can cause issues with building foundation)

This is not an all-inclusive list as an older property can have all sorts of issues.

What can you do to reduce these risks

  1. Look around the property yourself to see if you can see any of these issues yourself, major issues may be easy to spot
  2. Get a survey of the property conducted
  3. Do some online research about the area for issues such as knotweed, flooding and how common subsidence is in the immediate neighbourhood.
  4. A lot of second-hand properties will often have an archived record on portals such as Rightmove. Have a search and see if there are any strange patterns in the price or selling history of the property.

Short-term and holiday lets

Short-term yields can be very rewarding, however there could be a sting in the tail with the risks mostly surrounding seasonality.

  • You may have low vacancy during off-seasons effecting in periods of no rental income
  • High turnover of occupants can cause damage to the property

What can you do to reduce these risks

  1. A good management company will advertise everywhere to ensure your property is occupied as much as possible
  2. Make sure the property is above standard for the area so people choose to stay at yours above the competitors
  3. Expect and factor in furnishing may need replacing regularly

Student Property Investment

Student property can offer very high yields at a low entry points, making it a very attractive investment for cash buyers.

  • Cash purchase only for Purpose built accommodation (PBSA) when under a certain size means you may have to put down the entire cost of the property.
  • It is a risker exit strategy as you will only be able to sell to other investors, making it harder to pull out your capital if you need to
  • Students can be notoriously difficult tenants with chances of real damage to a property
  • There can be vacancy issues if you have not found a tenant by the start of University Term often in September

What can you do to reduce these risks

  1. Ensure the property is managed by a good management company. Quite often it will already be under a block management so look at your investment choices carefully
  2. Accept the property is more for income than capital appreciation/exit strategy
  3. Research the universities in the area and number of students
  4. Research the exact location and how it appeals to students
  5. Make sure you enquire about occupancy rates. You could always put yourself in the shoes of a student and see how many units are still available for rent, if it’s a lot then you may need to question the developments appeal to students

Conclusion

As a rule of thumb, you could say that the higher the reward the higher the risk, though this doesn’t always have to be the case if you take all the necessary risk averting actions we have suggested. New-build is likely to have less risks involved but the lower yields whilst a second-hand or off-plan property can have some of the highest returns but do come with more work or more risks.