It is a good reminder to all investors not to think property investing is without risk. There is a dark side to this business that could cost you in a big way.
Let’s get this straight. I believe everyone should have a go at property investing. But I feel compelled to write about the often glossed over downside to investing in property.
Over the many years in the real estate industry, I’ve come across so many instances where investors got burned in so many different ways.
Many of the so called advisors in the real estate market don’t often talk about what could go wrong. They don’t talk about the difficulty of getting tenants, or the strain of meeting your financial obligation month after month.
Instead, they highlight the sexy aspects such as tripling your money in a short period without doing anything or making millions within a year. Let’s face it property investing is a long term game hence the need to do due diligence prior to buying.
Unfortunately, the truth is anything but… and here are the reasons why:
Vacancies are more common than experts want to admit
Even in the most in demand and tightest rental markets, more often than not, you will experience vacancy. Even if you buy the best property in the best location, you are not immune to this unpleasant reality.
I know, I was in this situation too. In fairness, I bought the property many years ago and then decide to put it in the market after some renovation. I can blame it on the crime rates or even the influx of “immigrants” but the reality is that my shiny, newly renovated house sat in the market for weeks and at times months before the tenants moved in.
If you invest in an area where there are a lot of rental properties, the competition is even higher and you could lose tenants who can find a cheaper rental property than your own.
Maintenance cost can eat up on your rental income
Many experts say that if you buy a new property or newly furnished units, you’re pretty much guaranteed that your maintenance is low. Really? Try telling that to a landlord who has to spend thousands of dollars rectifying plumbing, leaking or electrical issues on a new property.
If you buy an older property, be prepared to allocate some additional budget for maintenance issues. There will be broken cupboard doors or electrical and plumbing issues on a regular basis.
Tenants disproportionately have more rights than landlords
This is another biggie that you should really get your head around if you’re planning to invest in property.
There are so many things you can’t just do to your property if it’s tenanted. For example, you can’t do a renovation, or even just casually drop in without giving your tenants ample notice period.
Tenants can also alter the property without asking you, for example, they can paint or install some fixtures without your consent. They should, but you won’t know about it until the next inspection that is assuming you do periodic inspection.
Lastly, you cannot just kick out your tenants if they miss their rental repayments. The tenants will continue to pay you partially every month or asked for extension of time month after month. You have to go through some legal measures before you can start the eviction process. During this time, your property is held at ransom by the errant tenant and costs and time are incurred.
You could have a dodgy tenant or tenant using the premise for drugs or criminal activities.
This really should be right on top of the list, but I prefer to think of people as fundamentally good. But the reality is, there are bad apples out there and there’s no amount of due diligence or tenant screening techniques that would uncover the bad ones. I’ve come across many landlords who lost a lot of money due to damaged properties or vandalism after the tenants disappeared without notice.
Your property could get flooded/burned
There’s really not much one can do if Mother Nature decides to dump massive amount of rain and flood your property. If it’s located in the flood-prone area, you can somehow mitigate this by paying extra to cover the flood damage. But the reality is, you would still lose income during repair or reconstruction period. The same goes with fire. My neighbour’s house recently caught fire, even if her property was fully covered by insurance, there will always be losses that you will have to confront such as months of loss rental whilst the property is being reconstructed. In this case my property, though not on fire was affected too as water seeped into my property and had to be cleaned, repainted and all electrical needs to be checked too.
You could overpay
You know the scenario; you see a property showcase, get so emotionally attached. You start imagining yourself owning the unit or in that amazing kitchen making awesome dinner for you and your family, even if it meant to be an investment.
Without realising it, boom! You’d do and pay anything to get that property. Despite doing your research and due diligence, that wild card, that is your emotion, could betray you at the last minute. Or you might have come across cases whereby your friend would just follow the crowd or group of friends without having any plans of what to do with the property. Fear of missing the boat is a very common scenario during the boom times.
It can be difficult to sell your property
A quick glance at property listing for sale or rental online reveals that some properties could sit on the market for months or even a whole year before they’re sold. This can be quite challenging especially if you are desperate to offload that investment. Sometimes, the pricing also has a lot to do with the market sentiment.
There is no guarantee your property will go up in value
Even if you’ve done your research, got advice from the most prominent advisors, and bought in the hottest suburb forecast to soar in value at that point of purchase, there is absolutely no guarantee that your property will go up in value every year as in the case of Bukit Beruntung development. Unlike the share markets, property markets move very slowly and there will be years when prices will not move at all.
It’s expensive to buy and sell properties
This is one of the biggest hurdles for people trying to break into property. It cost a lot of money to buy and cash in. When you buy a property, you have to pay for stamp duty which is calculated based on the purchase price. Then there’s the legal fee, property valuation, administrative fees and buyer’s agent if you used one. Oh, don’t forget about the deposit.
If you’re borrowing larger loan compared to the property price, you’d need less deposit, but beware that you will have to make higher repayments. When it’s time to sell, you’d have to pay capital gains tax if the property goes up in value, in addition to legal and other miscellaneous cost, which can be prohibitively high.
There are many more such as entangled with legal suits, premises vandalised when property is left vacant while waiting to be tenanted and the list goes on.
Do you have an experienced to be shared?