Risks To Consider When Buying Property
While property can be one of the most stable and lucrative types of investment, like other ways of investing money there are risks involved. Here at Aspen Woolf, we have a duty to our investors to help them understand the risks before they invest. That’s why we’ve put together this page outlining some of the most common risk factors.
Property prices falling
The strength of the property market nationally and in any given area is tied to a number of factors. Interest rates, market trends, and the local and national economies can all affect the value of an investment property. A downturn in real estate selling prices may not only affect the value of your investment, but also the developer’s motivation to complete work and their ability to finance the repayments you’re owed.
Past performance doesn’t guarantee future performance
We conduct thorough research to understand which areas are high performing for capital growth. However, many factors outside our control can affect return on investment, meaning that your property may not achieve the forecasted returns.
Undervaluation of the property
When you try to refinance or to sell the property your equity is at risk from undervaluation. To mitigate this risk you can invest in properties below the market value.
Mortgage rates may increase
The Monetary Policy Committee (MPC) sets the rate at which banks can borrow from the Bank of England. When the MPC sets a higher rate it can have a knock on effect on the cost of borrowing, including in the form of mortgages. The effect of interest rate increases depends on the kind of mortgage you have. If you have a variable rate mortgage linked to the Bank of England base rate you will most likely see an immediate increase in your mortgage repayments, the same goes for standard variable rate mortgages, although these are not necessarily linked to the base rate. People with fixed rate mortgages will most likely not be affected until they have reached the end of their deal. It is advisable to have a financial plan in place to counter any forecast rises in interest rates.
Being refused a mortgage
There are several reasons why individuals may not be approved for a mortgage and therefore will not be able to borrow against their new investment property. The two main reasons for mortgage refusals are high debt to income ratio (your monthly payments divided by your monthly income) and low credit scores. Other factors that could result in a refusal include volatile markets, lower than expected rental rates and individuals being over the LTV threshold (the ratio between your borrowing amount and the value of the property, this can particularly affect investors with 4 or more properties).
The developer goes bankrupt
Perhaps the most substantial risk to off-plan property investors is that the developer goes bankrupt, making them unable to complete construction. Unless there is insurance in place this can mean that all money put forward by the investor will be lost. The best way to mitigate against this risk is to work with trusted and long established developers.
The management company goes bankrupt
The management company is responsible for finding and dealing with your tenants and any issues with the units themselves. If the management company goes bankrupt your rental income will be at risk. Once again, the best way to mitigate against this is to work with long established and trusted companies.
Tenants refusing rent payments or having an empty property
Occasionally tenants may delay or outright stop paying rent. This is one of the biggest risks posed to landlords, especially considering that mortgage payments must be made regardless of actual rental income. Even when working with quality management companies tenants may not pay or the company may struggle to find tenants to let the property. It is recommended that investors have access to contingency funds to mitigate any such shortfalls.
Delays in construction
There are a number of reasons that can cause construction delays, from developer’s financial troubles to planning issues and unforeseen circumstances. Delays can threaten mortgage offers and will obviously prevent investors from earning rental income. Working with trusted developers on projects that have undergone careful due diligence will help mitigate these risks.
Liquidity Risks
It is important to understand how easily it will be for you to exit the investment before you buy. It can be the case that investors who want to cash in their investment have to wait a long time before they are able to make a sale. Buying in the best performing and highest demand areas is the best form of mitigation for this risk.
Off Plan Risks
Buying Off Plan Property carries greater risk than buying a property which is already built. This type of transaction requires you to make advance payments before you actually own the Property, and before it is built. You should ensure you fully understand the payments you are making and how those payments will be used by the seller/developer before completion.
We are not advising you and you must ensure that you fully understand the nature and risk of this transaction with your own lawyers before exchanging contracts, which will commit you to purchase the Property once it is built. As well as taking your own legal advice, you may also wish to seek independent financial advice from a UK-based FCA regulated advisor. Details of advisors can be found here: https://register.fca.org.uk/.
Solicitors will be able to advise you on the security the developers could offer you against your deposits. Ensure this security is covered in the documentation which your lawyers will send to you.
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Aspen Woolf is a leading property consultancy, focused on presenting the best performing investment opportunities to our clients. We search across the UK to find high growth, high yielding investments, and our particular strength in northern England represents the quality of investment that can be found in the growing cities of Liverpool, Leeds and Manchester. Have a look at what we have to offer.