Property can be a great investment until it goes pear-shaped

I was once a property investor. I had a beautiful cluster in a sought-after location which I rented out. Initially things went well, but I started running into a bit of trouble when some unsavoury characters decided to live in my property without paying. And when they eventually vacated, they left the property in a terrible state.

After experiencing this a few times over with different tenants, I decided to exit the property market completely. My story isn’t unique as I know many people who have experienced something similar.

On the other hand, I’ve met many people who have had a great property investment journey and have created considerable wealth this way.

In fact, I recently met a group of very inspiring women - some were near retirement and others were already retired - who also happened to be successful property investors. Their stories made me view property in a different light, but this was not enough to make me consider going back in!

Property investments can be great

It is possible to make a success of investments in physical property, but you have to know what you’re doing and be prepared and protected in the event that things don’t go as expected.

If you have a home loan, the obvious risk with property investments is rising interest rates. Read more:  Who sets interest rates and how do they affect me?

Another risk, to which property investors are often exposed, is having too much invested in property.

And what is the issue with that? As with any asset class, having all your eggs in one basket can lead to some serious issues. If you are a retiree and plan to live off your property income, you must be prepared for the following:

• Tenants not paying their rent on time, if at all;
• Damage to your property;
• Regular upkeep of your properties;
• Suburbs deteriorating, ultimately affecting the value of your investment;
• Being unable to exit a property, for whatever reason; and
• The time and the costs involved in getting in and out of property investments.

These situations are stressful enough to deal with at the best of times. The issue is exacerbated if properties make up the bulk of your investment portfolio.

How can your investments be great?

It is always a good idea to spread your risk, regardless of how you feel about certain investments.

Generally, returns from different classes tend to be uncorrelated. This means, if your investment portfolio is made up of different components, they are expected to behave differently.

Having exposure to different asset classes will ultimately smooth out your returns over time, reducing your overall risk and making your investment journey a lot more bearable.

And that’s what we want as investors, a manageable investment journey that will reduce our stress levels and improve our investment outcomes over the long term.

You certainly won’t get that from an investment portfolio that is very concentrated in one asset class as many investments in physical property are.

What you don’t want, especially near or at retirement, is a large property portfolio without other investments, and then running into problems with those properties. The transition into retirement is stressful enough and measures should be taken to ease that journey as much as possible. Read more: What are my choices at retirement?

How do you remedy your overexposure to property?

This is not an easy fix and may come with some unwanted costs and tax consequences. Consider the following:

• Have your properties valued at least annually to ensure that your investment value is going in the right direction. Should you find that there are properties not performing as expected, this may be an opportunity for you to sell.
  
  
• Once you’ve identified the property/ies to potentially sell, consider the costs of doing so carefully. You may also have to make peace with the fact that you’ll be selling at a loss.  However, doing this may save you from further losses and headaches down the line.
  
  
• Consider alternative investment options that suit your personal circumstances. In retirement, income generation is a priority. Capital preservation is a close second. In other words, try to find investments that will meet your income needs first. Read more: What kinds of annuities (pension) can I buy when I retire?
  
  The next best outcome from that investment is to at least keep up with inflation. Read more: Why must my investment beat inflation?
  
  It will be a difficult, but not impossible, task to achieve capital growth and income generation as it requires assuming more risk which retirees typically don’t have capacity for. Read more: What do I need to know about investment risk?

This is an important, and potentially life-changing, exercise and you would be well-advised to consult professionals, both in the personal finance and property space.