In my mind it’s important for people to go into property investing with their eyes wide open – which is to say, you should hope for the best but prepare for the worst.
Too often I see investors get disillusioned with real estate because they simply have unrealistic expectations about what they’re likely to achieve.
So in the interests of preparing you for some of the less-discussed realities of property investing, here are some of the ugly truths I’ve come to learn over the years:
Ugly truth #1. A positive cash flow property can turn negative, quick-smart
Some investors who count on the cash flow of their properties to fund their investments run into strife.
One of the common drivers behind this is maintenance.
Good on you if you’ve found a property that delivers more income than it costs you to own, but remember: properties don’t look after themselves.
Sometimes all it takes is one blown hot water system to put your positive cash flow investment in the red.
Especially since many cash flow, positive properties are in regional or remote areas where costs are higher.
Of course, 12 interest rate increases over the last year or so have also turned most cash flow-positive property into negatively geared properties.
The solution? Relying on positive cash flow to manage your investment property is a recipe for disaster.
Make sure you have a cash flow buffer in an offset account or line of credit, to help deal with property emergencies.
Ugly truth #2: Newer homes have upkeep, too
Many property “experts” are advocates for buying newer properties, suggesting that you get better deprecation benefits and lower maintenance bills.
But I’ve known landlords who were forced to spend thousands of dollars rectifying leaking balconies, poor plumbing, or electrical issues in newer properties.
Others have had to fork out big money to install dishwashers, ceiling fans, air-conditioning, and other mod cons that tenants of modern properties have come to expect.
Of course paying the premium necessary to buy most new properties also detracts from their long-term growth.
The solution? Regardless of your investment property’s age or size, this is another reason to have a “cash flow buffer” account - it will help take the financial pressure off if and when these expenses crop up.
Ugly truth #3. Vacancies can be more common than you’d expect
Even in the most in-demand property types in the tightest rental markets experience vacancies.
Your property could be priced for rent above market value; there could be an unanticipated flood of rental homes on the market, or it could just be a case of bad timing.
But as a property investor, you will have to face the reality of a vacancy period at some point.
The solution? Try not to list your property for rent during low-demand periods, like in the lead-up to Christmas.
I like to structure my leases so they are due for renewal in January when more people are on the move.
Ugly truth #4. You may end up with a crappy tenant
In fact, this is not even a ‘maybe’ – at some stage, it’s almost guaranteed that will have a tenant who doesn’t respect your investment.
Due diligence and tenant screening can help to weed out the dodgiest tenants, but ultimately, we’re all human.
Relationship breakdowns, job loss, and other life stresses can cause otherwise nice, normal people to treat your property poorly.
The solution? Make sure you take out the landlord’s insurance to help you cope with the result of malicious or accidental damage.
Ugly truth #5. Your property may get seriously damaged
Yes, it’s unlikely that your investment property will be flooded, burned down, or destroyed, but it does happen.
Whether it’s through malicious tenant activity or an act of nature, there’s always the risk that your property could sustain some serious damage at one point or another.
The solution? Again, landlord’s insurance and building insurance could be your saviour in this respect.
Ugly truth #6. Tenants have more rights than you do
You know that dodgy tenant we were talking about before? If you catch them doing the wrong thing, you can’t just kick them out.
Legally, you must go through a series of breach notices, issued for certain timeframes (to allow the tenant time to rectify the issue), before you’re allowed to evict them.
Even then, if they refuse to leave, life gets very difficult.
The solution? Don’t risk renting your property as a DIY landlord.
Property managers know the legal ins and outs of handling dodgy tenants, and they’re far better at neutrally sorting out tenancy disputes than you will ever be as the emotionally invested owner of the property.
Why would anyone invest in property?!
I hope I haven’t scared you off with my list of ‘worst-case scenarios.’
If I have, I apologise!
I would like to remind you that it’s unlikely all of these risks will come to fruition.
The main point I want to make is that property investing is rarely a straight path forward.
There will be positive moments and less-than-positive moments involved in your investing career, and it’s important to be prepared.
And in my experience, I’ve found that it’s those investors who can weather the challenges and take the good with the bad that tend to have the most success.
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Photo by @gettyimages on Canva.
