Investment Risk Assessment: Key Tips to Protect Your Wealth

Understanding Investment Risk Assessment

You've worked hard for your money, and now you're thinking about buying an investment property to build wealth and create passive income. That's a smart move, but before you dive in, you need to understand investment risk assessment. It's not about being scared of taking action - it's about making informed decisions that protect your financial future.

When you're assessing an investment property loan, you're basically working out what could go wrong and how you'll handle it. As a tradie, you already do this on every job site. You check the risks, make a plan, and get the work done safely. Property investment works the same way.

What Lenders Look at When Assessing Your Investment Loan Application

When you apply for property investment finance, lenders will put your application under the microscope. They want to know you can handle the investment loan repayments even when things get tough. Here's what they're checking:

• Your current income and employment stability
• Existing debts and financial commitments
• Your borrowing capacity for the investment loan amount
• The property's potential rental income
• Your deposit size (usually need at least 10-20% for investor deposit requirements)
• Your credit history and savings behaviour

Lenders typically use a rental income calculation that's more conservative than reality. They might only count 80% of the expected rent to account for vacancy rates and periods when the property sits empty. This buffer protects both you and the lender.

Key Risks to Consider Before Buying an Investment Property

Let's talk about the real risks you'll face as a property investor. Understanding these helps you access investment loan options from banks and lenders across Australia that suit your situation.

Cash Flow Risks

Your rental property needs to generate enough income to cover your investment loan repayments, body corporate fees, maintenance, and other costs. Many investors use negative gearing benefits where the property runs at a loss, which you can claim against your taxable income. But you need the cash flow to cover those shortfalls.

Calculating investment loan repayments accurately is crucial. Factor in whether you're choosing principal and interest or interest only investment loan structures. Interest only loans give you lower repayments in the short term but don't build equity through loan reduction.

Property Market Risks

Property values can go up and down. While Australian property has historically grown over the long term, there are no promises about short-term performance. Your property investment strategy should be focused on the long haul - think 7-10 years minimum.

Vacancy Risks

What happens if your property sits empty for weeks or months? The vacancy rate in your chosen area matters. Research the local rental market before committing. Areas with strong employment, infrastructure, and lifestyle appeal typically have lower vacancy rates.

Interest Rate Risks

Investment loan interest rates can change, especially if you choose a variable rate loan. A variable interest rate means your repayments can increase when rates rise. Some investors prefer fixed rate loans for certainty, while others use a mix of both. You can also look into investment loan refinancing options if you need to adjust your loan structure down the track.

Protecting Yourself: Risk Management Strategies

Now that you know the risks, here's how to manage them.

Get Your Loan to Value Ratio (LVR) Right

Your LVR is the loan amount divided by the property value. The higher your LVR, the riskier lenders consider your loan. If you borrow more than 80% of the property value, you'll usually need to pay Lenders Mortgage Insurance (LMI), which protects the lender if you can't repay.

A lower LVR means lower risk and potentially access to better investor interest rates and rate discounts. If you're expanding your property portfolio, you might leverage equity from your existing properties to fund the investor deposit on your next purchase.

Build a Buffer

Have cash reserves to cover at least 3-6 months of investment loan repayments and property costs. This buffer protects you during vacancy periods or unexpected repairs. As a tradie, you know that jobs can dry up or expenses can pop up out of nowhere - your investment property is no different.

Understand Your Tax Benefits

Property investment comes with significant tax advantages. You can maximise tax deductions by claiming:

• Loan interest payments
• Property management fees
• Maintenance and repairs
• Depreciation on the building and fixtures
• Insurance costs
• Body corporate fees
• Stamp duty (in some situations)

These claimable expenses reduce your taxable income. Many tradies find that negative gearing benefits help offset their typically higher incomes.

Choose the Right Investment Loan Features

Different investment loan products offer different investment loan features. Look for:

• Offset accounts to reduce interest charges
• Redraw facilities for accessing extra repayments
• The ability to fix part of your loan while keeping part variable
• Flexibility to switch between interest only and principal and interest
• Options for equity release as your property grows in value

The investment loan benefits you need depend on your personal property investment strategy and financial goals.

Location, Location, Location

Where you buy matters more than what you buy. Research areas with:

• Strong rental demand and low vacancy rates
• Good infrastructure and transport links
• Employment opportunities
• Schools and amenities
• Potential for capital growth

Don't just buy in areas you know. Sometimes the suburbs you've never heard of offer stronger investment property rates of return than the ones making headlines.

Working with Specialists Who Understand Tradies

As a tradie, your income structure might be different from typical PAYG workers. You might be self-employed, run your own business, or work on contract. This can make investment loan applications more complex.

Working with a mortgage broker who understands the trades industry means you'll have someone who knows how to present your income in the right way to lenders. They can help you access the full range of investment property finance options and find the investment loan interest rate and loan structure that works for your situation.

If you're just starting out, check out our guide on buying your first investment property for more detailed information on getting started.

Taking Action on Your Property Investment Goals

Investment risk assessment isn't about finding reasons not to invest - it's about understanding what you're getting into so you can build wealth through property confidently. Every successful property investor has managed risks along the way. The difference between those who succeed and those who don't is preparation and knowledge.

By understanding the risks, choosing the right investment loan options, and having solid strategies in place, you can work towards financial freedom and portfolio growth that sets you up for the future.

Ready to discuss your investment property plans with someone who understands the trades industry? Call one of our team or book an appointment at a time that works for you. We'll help you assess your options and find the right investment loan products to match your goals.