It’s no secret that buy-to-let property is considered a relatively low-risk investment and one that outperforms returns offered by other asset classes in the long term.
There is a uniqueness about investing in property that you don’t get with any other type of investment – it can give you an income, capital appreciation and a tangible legacy that you can leave to your loved ones.
But as with any investment, there are still several risks that all would-be landlords should consider and take care to prepare for.
To name but a few:
- Property market crash
- Interest rate rises
- Rising costs
- Poor demand
We’ve seen it before in the early 1990s and then again more recently in 2007/8. A property market crash will see a dramatic drop in house values that often results in negative equity for many homeowners and investors. This makes selling property a problem, especially when the mortgage is larger than the value. In worst case scenarios, people will find themselves struggling to keep up with mortgage payments and at risk of their property being repossessed.
Over any medium to long period of time, interest rate fluctuation is also inevitable, as well as variations in landlord costs – just take lettings agency and maintenance fees for example.
And what if nobody wants to rent or buy your property at the right price? You’d find yourself with an investment that will lose you money.
But don’t panic, there is a relatively simple way you can mitigate these risks.
How can you protect yourself?
The most important mitigation against any risk is to do extensive research before making your move.
Buy-to-let appeals to many would-be investors, but as our recent research shows, the majority of landlords become so through chance and therefore have a severe lack of understanding of the market.
Failing to complete any due diligence or thorough research could put your money at great risk – especially when buy-to-let property is likely to be the biggest single investment someone will make.
Understanding the market from the outset will then help you to avoid scenarios such as investing in locations or properties where tenant demand is low, voids are high and rental yields unattractive.
Having conducted such thorough due diligence, you should then be in a position where you recognise that the other most important risk mitigation is a high level of cash flow.
Ensuring properties are achieving as much rental income as possible will provide a buffer against rising costs, whether that’s an interest rate rise or an unexpected void period. It’s also important not to over-leverage, which should give you added protection during a property market crash.
Scenario planning is absolutely key. Ask yourself what could go wrong and what you could do to prevent it? At what point will your investment breakeven and how likely is that to happen? If you are planning to sell, either because you want to or have to, are market conditions working in your favour?
For PPP Partners, their buy-to-let businesses are built on appreciating assets that generate up to three times as much rental income as standard, single-tenancy rental properties. This has enabled them to mitigate the risks outlined above – even during the recent financial crisis, their properties were still making a profit when many other buy-to-let investors were making a loss.
By following such a tried and tested system, buy-to-let investors can protect themselves against market fluctuations.
