As a property investor, you may worry that your property investment is risky. Just as any form of investment, there will definitely be risks involved with property investment. You may not be able to avoid the risk fully, so managing the risk is the key to a successful investment.
Especially in this period of property market euphoria in Singapore, it is even more important to manage and reduce your investment risks. Here I will highlight some risks that you may expect in your property investment and how you can potentially manage them.
1. Are you buying beyond your means?
Do the monthly instalment test. Calculate how much mortgage you have to pay monthly if you were to purchase that investment property. If after setting aside the monthly instalment in your budget for the property, you have to live below your means, then I would say that you might be over stretching yourself in the purchase.
2. Interest rate increase
Interest rate increase is expected over the next few quarters. Therefore you should be prepared for an increase in the monthly instalment for your property over time. When planning for your investment property purchase, do account for future higher interest rates when doing your monthly mortgage estimation. You can plan for the “worse case” interest rate scenario before the purchase.
Keeping a sufficient cash buffer to offset the loan to reduce the interest payable is also a way to reduce the risk. Alternatively, you can choose a fixed rate loan to lock in the interest rates for the next few years to ensure a more stable monthly mortgage payment.
3. Sudden need for cash
After purchasing of your investment property, do remember to set aside at least six months of your family monthly current expenses, including all property mortgage instalment as emergency fund. This is to guard against any unexpected increase in the interest payments, job loss, emergency family expenses, etc. I will recommend that you look at a higher buffer. Six months of buffer will be the minimum.
4. Your property decreases in value
Even if you were to purchase a good investment property, do expect some market volatility. Planning for a long term investment horizon can help to minimise the risk of short term market fluctuations. Being in the market long enough can also potentially help you to recover the short term losses. Ask yourself these question:
- Do I have the holding power?
- What if the market were to collapse?
- Am I able to sleep properly if the property market falls sharply?
- Do I have the holding power if the market were to change against me?
Remember again, don’t buy what you cannot afford.
You can also improve your chances by buying a high growth property. You should only buy in locations that are well researched and demonstrate evidences of good future appreciation and growth.
5. Poor or No rental Returns
There may be periods of time in the property market whereby the rental demand is weak. In such circumstances, you may not be able to rent out your property or the rental returns may be low. One way to minimise this risk is to set aside cash buffer in your bank account, similar to what is mention in point three. By setting aside cash buffer in your bank account, you can still pay the monthly mortgage instalment while waiting for the apartment to be rented out.
In addition, to improve your chances of renting out your property and getting a higher rental return, do bear in mind to invest in areas with good evidences of potential future growth to ensure ongoing rental demand. Do analyse the location for amenities, tenant catchment and transport convenience. Pick only locations with good rental yield.
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