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. At Platinum Property Partners (PPP), we love that there is a uniqueness about investing in property that you don’t get with any other type of investment. Property can give you an income, capital appreciation and a tangible legacy that you can leave to your loved ones.
Crash and Earn
However, as with any investment, there are still several risks that all would-be landlords should consider and 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 in 2007. A property-market crash will cause 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 will be at risk of their property being repossessed.
Over any medium-to-long period of time, interest-rate fluctuation is inevitable, as well as variations in landlord costs – just take lettings agency and maintenance fees, for example. Not to mention the additional stamp duty for landlords that came into effect last year. 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 reduce these risks and still earn money on your property during tricky times.
How Can You Protect Yourself?
The most important mitigation against any risk is to do extensive research before making your move. Buy-to-let property appeals to many would-be investors, but as our research shows, the majority of landlords don’t set out to become landlords. They become landlords through chance, and therefore don’t understand the market at all.
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 help you to avoid scenarios such as investing in locations or properties where tenant demand is low, voids are high and rental yields are unattractive.
A high level of cash flow is important in risk management. 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 get into too much debt – or over-leverage. If you do, you’ll be risking any added protection you may need during a property-market crash.
What Could Possibly Go Wrong?
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 break even 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?
As business magnate Warren Buffett once said, “Risk comes from not knowing what you’re doing”. Luckily, Platinum Property Partners do know what they’re doing, so will help you reduce your risks. For Franchise Partners at PPP, their specialist 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.
By following PPP’s tried-and-tested system, buy-to-let investors have protected themselves against market fluctuations, plus the other risks outlined above. Even during the latest financial crisis, their properties were still making a profit when many other buy-to-let investors were making a loss.