Reducing the Risk
As with any investment, there are risks involved with property investment. It's up to you to reduce that risk as much as you can.
For many investors, that need to cover any shortfall between rent and expenses is the biggest risk.
If your rent doesn't cover the expenses, then a reduction in your personal income can cause real problems. Your income could reduce for a number of reasons including:
- Reduction in work hours or bonuses
- Reduction in self employed earnings
- Accident at work, home or elsewhere
- Disease or illness
- Unexpected events such as pregnancy or a sick family member
If your rent does usually cover the expenses, then you have much lower risk but could still have problems in the event of a natural disaster, fire, bad tenants or any such situation where the rent may stop coming in.
Here's some ideas on helping to reduce the above risks on your property investment.
When purchasing a rental property, the greater the rental yield (annual rent compared to property value), the less money you will need to put into the property. The less money you need to put into the property, the less impact a reduction in income will have on your investment property and the ability to service the mortgage.
If you or your partner passes away, a life insurance policy should ensure that your family can continue to have a reasonable standard of living. You wouldn't want to leave your family in a position where they couldn't pay the mortgage so life insurance is a good option to reduce this risk.
If you or your partner are injured, ACC can pay up to 80% of your income so you need to consider whether you could survive on that amount. Remember, ACC will only apply to an accident, it doesn't cover illness or disease. If you or your partner become temporarily or permanently unwell, you need to consider how this would affect you financially. Income, trauma and permanent disability insurance are a great way to reduce your financial risk should you fall ill, become injured or disabled.
What would happen if your tenant left owing you thousands of dollars in rent or they damaged your rental property? To reduce this risk you could look at getting landlords insurance to cover these events.
Revolving Overdraft Facility
What happens if you or your partner are made redundant or cannot work for a period of time? One option that would give you time to get back onto your feet is to arrange a revolving overdraft facility with your bank that has available funds to be drawn on. That way you can continue to pay your mortgages from that facility until you are back earning money again. It's always best to arrange this facility while you still have a job. If you try and arrange an overdraft facility after your income has dropped, chances are the bank won't help you out.
Disclaimer: The above article is general in nature and we recommend you seek professional advice tailored to your specific personal situation.