We understand that any investment has its own set of risks. Life is not about avoiding risk, but about taking calculated risk. Knowledge is power, when you have more knowledge, you are more capable of making an informed, successful decision.
When it comes to property investment, it pays to speak with an experienced investor before making any final decisions. Investment strategies such as buying house and land packages “off the plan” can work very well, provided you’re well-versed with all the pros and cons. As with anything, there are always different strategies to consider when diving into property investment. Once you understand the different strategies, you will then be able to select the right strategy for you. Take a look at these 6 risky property investment strategies to help you make an informed decision later on down the track.
1. Wealth Creation Seminars
Wealth creation seminars are a basic strategy designed to sell you simple, easy ways to make money, all while promising big results with a seemingly small investment of time. They are selling you an idea, not a tailored made solution. They work on exaggerating the benefits of their strategies so that you spend $5,000 – $6,000 on their 2 – 4 days’ workshop that let you in on their BIG secret.
But here’s the thing… When you try to implement their strategy, you have a higher risk of failure as you have limited or no guidance from them. They provide minimal support as most of the contact is undertaken by email or by phone. Rather than getting caught up in these seminars, work with a successful investor that offers you face-to-face guidance throughout each and every stage of the investment process to maximise your chance of success.
2. Commercial Property Investment
Commercial properties can offer many benefits such as higher rental yield and outgoings that are paid for by the tenant, not to mention longer-term tenancies. However, there are also many risks associated with commercial properties. Consider the following:
- Your commercial property can sit vacant for many months before sourcing a suitable tenant.
- It is harder to find a buyer, particularly in poor market conditions.
- It may take longer to sell a commercial property, when compared with residential.
Commercial properties are considered to be high-risk. Typically, banks will only lend up to 60%, meaning you are required to source the large 40% deposit.
- Commercial properties may be associated with sluggish growth as they may have little land content or be located in a suburb where land is abundant, therefore impeding growth and capital value.
When it comes to investment, your strategy should always be to minimize any potential risks. As commercial properties are considered to be high-risk investments, be sure to make careful considerations before moving ahead.
3. ‘Flipping’ Property
When an individual ‘flips’ a property, they buy a property for a cheap price and then sell it for a profit within a short period of time. ‘Flippers’ may also buy homes that are in needs of repairs, then restore the property to pristine condition before selling for a higher price. No matter which way it is done, flipping property come with its own set of risks. Think about these aspects before deciding to flip one of your own:
- When you consider high holding and transaction costs such as stamp duty, loan repayments and selling costs, you may find yourself spending upwards of $30,000 – $40,000 on a property worth $300,000 – $400,000.
- No one has a crystal ball and can guess what the future will bring. If you buy and sell quickly and the market swings against you, you may find yourself battling a very costly outcome.
- Many people watch television shows that do not represent reality. It’s easy to see TV flippers buying properties for $380,000 spending $30,000 and then selling straight away for $450,000, but it very rarely actually works that way in real life. Be realistic with your expectations.
‘Flipping’ property is very risky and, if not done correctly, can be very costly. Always try to minimize your risk from the get-go to avoid any future heartache.
4. Property Development
While property development can be very profitable, it is also very risky and time-consuming. Consider these risks:
- High capital – Banks typically lend about 60-70%. This means that you will need to come up with a 30 – 40% deposit, plus other additional costs including stamp duty.
- Property development is time-consuming and risky. Development can take 1 – 4 years to complete and requires a lot of time and energy.
- You will experience huge holding costs from start to finish. When thinking about finances, be sure to consider interest rates, council rates, bank fees and any additional construction costs.
- Property development requires experience and skill when purchasing the site, organising building permits, developing the right team of professionals, gaining approvals, managing finances and conducting feasibility studies to make sure it’s profitable. As such, if you do not have prior experience or knowledge in property development, you’re likely to run into all kinds of trouble.
- It is common for people to purchase risky development sites without realising. Some sites may have issues with flooding, service management, safety etc. Always make an informed decision.
- Property development is considered to be very risky when you consider the number of developers who go broke throughout the process. As mentioned, your initial wealth building strategy is all about minimising risk.
5. Risks With High Price Established Properties
Buying an established home in Melbourne is simply out of reach for many investors due to the low rental yield and very high property values. Many investors will make the mistake of investing in one or two established properties which will over-commit them financially and, as such, make it extremely difficult for them to invest in the future.
Always avoid expensive properties with low yield. An affordable “off the plan” house and land package in Melbourne’s growth locations can offer you a high rental return and high tax benefits, all of which may help you to invest in your next property sooner.
6. Cash Plow Positive Property
The focus these days is on rental yields with smaller capital growth. There are many risks associated with cash flow positive properties, such as the following:
- They typically have a very slow capital gain. Cash flow positive properties can attract less demand, such as those in rural locations or regional areas. As there is less population growth in these areas, the properties typically grow at a much slower pace.
- Cash flow positive properties typically have higher vacancy rates. If you purchase in an area that is less desirable, it can take you months to rent it out.
- Lastly, wealth is created through capital growth. You need capital gain in order to leverage to invest in your next property as soon as possible.