3 ways to reduce your property investment risk

Here's the trick: smart investors hope for the best but prepare for the worst.

On the other hand, uneducated – or fly-by-night – investors buy any old property thinking it will always go up in value.

But when the market softens what do you think happens to these two different types of investors?

The best way to explain it is that the prepared investor continues on their real estate journey, while the unprepared one usually gets into financial trouble.

So how do you make sure you're one of these strategic investors?

Firstly, by following these three simple steps:

1. Interest rates reality

It's no secret that we've been in a period of historically low interest rate for a number of years now.

While no one knows if this is the "new normal", it's unlikely that rates will stay this low for much longer.

Now don't get me wrong, I'm not suggesting that the days of nine per cent interest rates are on the horizon.

Rather, we are likely to see a few 0.25 per cent rate rises in the coming years. Possibly next year!

Sophisticated investors know that low interest rates won't last forever, so instead of relying on them to help service their loans like uneducated investors do, they take a strategic position with many locking a portion of their loans to fixed interest rates.

Others include higher interest rates into their loan repayment calculations and ensure they have financial buffers to hold their properties over the long-term... regardless of what the interest rate is.

2. Overheated market

The scramble for Melbourne and Sydney property over the past few years has seen home values reaching new peaks.

Yet some newbie investors are still keen to get into these markets because they're scared of missing the profit boat.

The sad fact is they already have.

New investors generally buy at the top of the market, which means they pay a premium for their property and, because of their finance constraints, it's often an inferior one.

What do think that will mean for their investment future?

Let's face it: they've paid over the odds for their secondary property, so not only do they likely have a high mortgage, their chances of solid capital growth anytime soon are limited.

Even if they wanted to add more properties to their portfolio, they'd struggle to pull together enough equity to do so because their property values haven't increased.

Now I'm not saying it's too late to get into Australia's two big property markets because it isn't.

But you can't count on ongoing double digit capital growth to cover up poor investment selection.

However, you can minimise your risks by buying investment grade properties in suburbs where the locals have higher disposable incomes than average and are unlikely to suffer mortgage stress when interest rates rise in the future.

And you'll be protected by owning the type of property that will be in continuous strong demand in the future, which will underpin its value.

3. No strategy

If you don't know where you're headed, how will you ever get there?

Novice investors falsely believe that all property is investment grade so many buy real estate on little more than a whim and a prayer.

Others look for the next "hot spot" and are really just speculating rather than investing.

This means they often end up buying in regional areas or boom and bust locations like vacation locations (we're looking at you Gold Coast) or mining towns.

And they usually lose a lot of money not long after they do so.

On the other hand, sophisticated investors have a clear and set strategy before they begin.

They develop their end goal and then work backwards from there.

In other words, they invest in the best real estate in locations that will outperform the averages.

And by doing so, they're future-proofing their investment portfolio as well as their profits since they recognise that the right location will do the "heavy lifting" for their property's long-term performance.

I've said it before...

Successful property investment is all about strategy.

It's also about patience, education, and taking calculated risks.

There is no way that you can eliminate all risk from your investment decisions.

But you can certainly minimise it by understanding that property investment is about getting rich slowly.

In real estate, it's the tortoise that wins the race, not the property hare.