Eight risks that can turn investment properties into financial nightmares

Eight risks that can turn investment properties into financial nightmares

Astute investors know that all properties have defects which if not identified during due diligence, can be money pits. There is a small window of opportunity during the brief due diligence period to identify these risks prior to purchase.

Identification of risks provides a bargaining opportunity to either negotiate a reduced price or request the risks be removed at the vendors cost. Risk avoidance can be achieved with meticulous due diligence, particularly in investigation of eight potential deal killers listed below.

1. Asbestos contamination risk?

Asbestos materials of various types were commonly used in Australian property construction between 1940 and 1990. Asbestos materials were embedded in wall cladding, roofs, gutters, drain pipes, vinyl flooring, electrical wiring thermal insulation, boilers, exhaust pipes, switchboards, thermal insulation and inside fire doors.

The new National Work Health and Safety Act of 2011 requires owners of buildings constructed before 2003 to conduct an asbestos survey. Where asbestos materials are identified, this triggers the mandatory requirement for an asbestos register and asbestos management plan (AMP). Some property owners appear to be unaware of this new obligation.

An asbestos register is necessary to track of asbestos materials remaining (or removed) in investment properties. Asbestos may also be located in inaccessible areas and unfortunately discovered during re-development with sometimes disastrous and costly results. Asbestos materials if disturbed can cross contaminate internal areas of the buildings, requiring evacuation, loss of rent and potential occupant litigation.

Asbestos removal is a legally notifiable project, which can result in extremely costly asbestos removal projects. Careful investigation during due diligence can forewarn investors, revealing the true cost of asbestos removal. Armed with detailed information and cost options, investors can then more accurately evaluate if they wish to proceed with the purchase or avoid the risk.

2. Electrical switchboard over-loading and fusion risk?

Building electrical cables and switchboards can become over-loaded with tenancy changes and added electrical equipment. The overloading of wiring inside electrical switchboards can remain undetected for many years. Electrical fusion is one of the primary causes of fires within buildings where overheating of electrical switchboards and wiring starts fires.

Further electrical risks can include lack of earth leakage protection (ELP) to reduce the risk of electrocution to occupants. Poor quality electrical installation and modifications over time, can overload electrical switchboards leading to potential fires or equipment failures.

A review of electrical maintenance should be included in due diligence investigations to identify weaknesses and potential costly failures.  Where electrical maintenance is inadequate this may void insurance cover, with owners exposed to remediation costs.

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