In any type of investment, rewards and risks go hand in hand. Property investments, in recent years, have become an integral part of almost all mixed asset portfolios. But is property a fail proof investment? Well, I don’t have an answer. However, I do know that some of the very common challenges faced by the property investors:
Focus exclusively on property
Many people invest in properties expecting healthy returns which sometimes result in very less money in their pockets for them to consider other types of investment. This inadvertently leads to property taking up a huge chunk of your financial portfolio, which may backfire if the realty market languishes. You must give due consideration to diversification of your investment before buying investment properties.
Tax implications of short term property investment
Many enter the property market with an intention to reap short term profits; however, these investors do not realize the tax implications of short term property trading. If a property is sold within 1 year of the purchase, you have to pay tax on the whole capital gains based on your personal tax rate. However, if you keep the property for more than 1 year, you only pay tax on 50% of your capital gains.
Liquidity risk
Property investments come with potential liquidity risk, which implies that it cannot be easily and quickly converted into liquid cash. This is especially correct if your property is a bit difficult to sell when you have to sell it, for example, out of job for an extensive period.
Lack of adequate research on the location and builder
Property investment is all about location. To reduce liquidity risk, one must indulge in thorough research before determining on the right property. The property that you purchase must be in a locality that is well connected to other prime localities of the city; not only that, there should be a constant demand for properties in that area. One must also check the reputation and background of the builder to ensure that the project will be completed in time, and that you will not have to incur losses because of delays in the completion of project.
If you have done your research based on the above mentioned factors, you perhaps minimize the risk the risks associated with property investments that most of your peer investors.