Top 6 uncertainties in property investment

Every time I create a financial plan for a property investor I ask, “Is there anything worrying you? Is there anything making you nervous about investing in property?”

Almost every single time investors say, “It’s the uncertainty” … what if this happens? What if that happens?

Here at Opes Partners, we believe in being blatantly honest. That means answering every question investors have. That way you have all the information to make a good investment decision.

So in this article, you’ll learn the top 6 uncertainties in property investment. You’ll also get strategies you can use to combat them.

#1 – Whether and when your house goes up in value

Firstly, house prices are unpredictable. You don’t know when house prices will go up. This is important, because investors make most of their money through capital gains.

So, the first thing you need to acknowledge is that property values won’t always go up.

Over the long term, house prices will likely go up. That’s what’s happened in the past.

But, in the meantime they could go up, down or stay the same.

In fact, we estimate that in Auckland there is a 70 per cent chance that your house value goes up in any given year. But, that means there is a 30 per cent chance that your house goes down in value.

There are two ways to combat this.

First, by holding on for the long term. The above graph shows that the longer you hold the more likely it is that your house goes up in value.

The second step is to buy in an undervalued market. These are the areas that tend to increase in value more quickly in the near term.

Right now those are the bigger cities e.g. Auckland, Wellington, Christchurch.

#2 – How fast you’ll find a tenant

Many investors worry that they won’t be able to find a tenant. They fret that their house will be vacant for months, even years.

Some vacancy is to be expected. When you first buy a property it can take around 4 weeks to find a tenant and for them to move in.

And you can’t expect to have the same tenant for 15 years. As tenants decide to move on, your house may be empty for a week or two while you find a replacement tenant.

But the exact amount of vacancy your property gets is uncertain. That’s especially true if you are buying a New Build property that isn’t built for a while.

The rental market can change quickly. You don’t know exactly how many people will be looking for rentals in the future.

One way to combat the uncertainty is to account for this when you run the numbers. Here at Opes, we recommend accounting for 2 weeks vacancy a year when you run the numbers.

If you’re buying a property, we also recommend that you allow for 4 weeks of vacancy when you first buy. That way, you’re not surprised if it takes time to find a tenant.

If you don’t have any vacancy, then good news, you’ve got extra cash in your bank account.

You can also buy a property that suits tenants in your area. For instance, in Ranui (Auckland) more people rent 3 and 4-bedroom properties. It’s a more family friendly area.

But in Addington (Christchurch) tenants prefer 2-bedroom homes.

So, while a smaller property might work well in some parts of the country ... you might need a larger home in others.

#3 – Law changes that hurt property investors

Governments change. You can’t forecast what a new government will or won’t do in 3 years’ time. Some of those changes could hurt property investors.

For instance, Labour never campaigned on interest deductibility. It wasn’t in their 2020 manifesto, but they announced it anyway 5 months later in early 2021.

But the government isn’t always the culprit. The Reserve Bank sets debt-to-income (DTI) ratios and loan-to-value (LVR) ratio restrictions.

The best way to combat this uncertainty is to get into the market as quickly as possible. And no, that’s not just us saying that because we help investors buy property.

Most of the rule changes make it harder to buy investment property. That’s why some investors can get the bank to say “yes” today but the bank might say “no” in 2 years if the rules change.

It’s the same even if the government brings in new tax laws. Take interest deductibility as an example.

The rules didn’t hurt you as much if you had owned a property for a long time. Your property value had gone up, so had the rent, while inflation eroded the value of your mortgage.

So long-term investors weren’t hurt as much as the newbies entering the market with large mortgages.

You can’t forecast future government policies. But, if you’ve been in the market and built up a bit of wealth, it can help you weather the storm.

#4 – Whether you have a dodgy tenant

Most investors will have had their share of dodgy tenant stories … including myself. These are the ones that don’t pay rent, or trash the place. But by and large tenants don’t give you too many headaches.

But, whether a tenant is respectful (or not) is uncertain. The prospective tenant might seem great at the start, but what happens if they’re just a good actor?

The first and best way to avoid a dodgy tenant is to use a property manager. They’ve got the skill and the experience to weed out the good from the bad.

Your other option is to get landlord insurance. This is an insurance policy that can protect you against some bad-tenant scenarios.

Under some policies, if your tenant leaves without paying rent, the insurance company pays the rent instead.

#5 – Where interest rates go

Your largest expense as an investor is the interest on your mortgage. Whether interest rates go up, down, or stay the same, they will impact your returns.

But economists aren’t good at predicting where interest rates will go. They can make a guess based on the latest data, but that data often changes as new facts emerge.

Two years ago it was Covid. Then inflation. Then wars. In 6 months it will be something else.

So the exact interest rate you pay will be uncertain over time.

How do you combat that uncertainty? The first step is to look at the bigger picture. Don’t look at where rates will go tomorrow or the day after.

Instead, look at why interest rates are where they are right now … and where they are likely to go in the next 6 – 12 months.

For example, inflation is really high right now. But if you look at the forecasts, most major banks should decrease their rates mid-year.

You can also minimise the risk you take by choosing a longer fixed rate, e.g. the 3-year or 5-year rate. You’ll often pay a higher interest rate, but you might prefer the certainty.

The last way is to take out less debt and use a cash deposit. This might not be possible because you need cash in the bank. But if you take out a lower mortgage, then you won’t be as impacted if interest rates change.

#6 – Unforeseen maintenance costs

This is the biggest lesson I learned when buying older houses. They often come with large maintenance costs.

Some investors see a decrepit-looking 100-year-old house as a project. But the big jobs – like a new roof or a new hot water cylinder – cost a lot of money without adding value.

This is why I personally buy New Build houses, or properties that aren’t as old. They are less likely to break down because they are newer. They also come with warranties, so if something breaks the builder may have to pay to replace it.

And then there’s everything else

All investments come with uncertainty.

And there are so many other sources of uncertainty that haven’t made this list. That’s because everyone will have factors that play on their minds.

When those come up, there are two questions to ask yourself. First, how can you address the uncertainty?

Can you use data to buy the right house? Can you get insurance to cover that risk? Or, can you run the numbers to account for it?

But not all uncertainties can be explained away; some you have to live with. That’s where you need to ask: “Does this uncertainty really matter?”

How likely is it that the risk happens? And if it does happen, could you weather the storm?

All investments come with some risk. If you’re going to improve your life through investment property you need to get comfortable with some level of uncertainty.

But if you avoid all risk, your returns will likely be small.