Property investment is an inherently risky business: you're spending a lot of money on one single, immovable asset with lots of things that can go wrong – then handing it over to a virtual stranger to live in.
Since talking to lots of investors though, I've realised that perceived risk is a big factor too: even if in reality a meteor is never going to strike your property, if you're worried about it happening it will still affect your decision making.
So I've listed out six of the most common concerns I hear, along with suggestions for what you can do to control (not eliminate) the risk. It's unlikely that you'll be able to make one single investment that minimises every possible risk, but you can choose the risks that worry you most and adapt your investing approach accordingly…
Type of risk: Capital values falling and putting you in negative equity
Solution: Buy the property for less than it's worth
The phrase “you make your money when you buy” is trotted out frequently for a reason: it's true. It also gives you some level of protection from a falling market.
If you buy a property for 10% less than it's worth and the market falls 10%, you're back to where most people would have started. On the other hand if you'd overpaid by 10%, you'd now be 20% down on the deal and (if leveraged) a large chunk of your equity would have been wiped out.
An alternative option is to find a way of quickly adding value – whether that's an extension, refurbishment, change of use or something else.
Type of risk: Everything going wrong!
Solution: Buy new, or get everything expensive done at the start
A common new landlord worry is a never-ending stream of phone calls about things going wrong. (And it's not entirely misplaced – I've been there.)
There are two ways to protect against this one. The first is to buy a new or nearly new property: major defects will be covered by guarantee for the first 10 years, and everything that's not covered will still be near the start of its useful life rather than the end.
The other is to bring repairs forward by doing them all when you first acquire the property. If the boiler is ancient, some roof tiles are slipping and the electrics look a total mess, don't wait for them to fail: get them all done at the start, and treat the cost as if it were part of the purchase price. You're still incurring the cost, but psychologically you could find it less painful if you're prepared for it – and it's happening at a point when you've budgeted accordingly.
That doesn't protect you against emergencies and truly horrible things that can always happen – so…
Type of risk: Horrendous leaks / fire / getting hit by a plane
Solution: Insurance
I was recently talking to a landlord whose property had a very serious fire on new year's day and rendered the house uninhabitable. It doesn't happen often, but it does happen.
That's why insurance is a must. It will be a condition of any mortgage anyway, but if you're particularly worried you might want to opt for a policy that gives you a higher level of cover than the bare minimum you could get away with. Get a quote from the supplier I use here.
Then there's landlord emergency insurance, which covers things like leaks, boiler breakdown and sanitation issues. The idea is that the tenant calls the insurer's helpline, they send someone to remove the immediate danger for free, and you don't have to worry about anything.
I've heard mixed reports of this type of insurance, but I had a claim paid out last year which covered the cost of the insurance for the next 10 years at least – and find it useful peace of mind.
Type of risk: Interest rates rising dramatically
Solution: Stress-test, and/or fix for a long time
High interest rates are a very common concern, and you'd be right not to take low rates for granted: you can guarantee that rates will eventually be higher than they are now, and historically there have been periods when they've been very high.
One obvious solution is to fix for a long time: fixes as long as 10 years are available, although of course rates will be higher than if you fixed for a shorter period. The other drawback (apart from the higher rate) is there will usually be an early redemption penalty, so you'll incur a fee if you want to move to another lender to release more equity.
So the other option is to stress-test your investment so you can reassure yourself that the property will still make money even if interest rates hit X% – where X could be seven or eight percent, or even higher if you're particularly cautious.
To be even more cautious, you could even “pretend” that your interest rate is higher now and put the difference into a separate fund each month – and use that fund to cover your extra outgoings if your repayments ever go higher than the rent covers.
Type of risk: Won't be able to find tenants
Solution: Research the market carefully, and look out for potential “shocks”
This is a very common one: what if you can't find tenants, and your property sits empty costing you money?
The main way to reduce this risk is through research: make sure the property you're buying is in an area with robust demand, which you can establish by checking listings on Rightmove and Zoopla and speaking to local agents to see how many properties are available and how quickly they're snapped up.
Also look out for potential future shocks to demand or supply. For example, if a huge development of 2,000 flats is being built next door that's going to soak up the demand that you're currently enjoying. Or if demand is a result of one big local employer, what would happen if they shut up shop?
Type of risk: Tenants can't pay or won't pay
Solution: Take out Rent Guarantee Insurance (RGI)
No two ways about it: tenants moving in on a 12-month contract and stopping payments after month two would be a total disaster for almost any landlord.
That's why I like Rent Guarantee Insurance (RGI): it completely takes that concern off the table because if the tenant doesn't pay, the insurer will. Some landlords argue that insurers will only cover “good risks” so you'll come out ahead if you don't bother with the insurance – and they're probably right, but I just like the peace of mind.
So there you go – six big risks at least somewhat neutralised.