Any investment that you make in the property market has a certain level of risk. Here, we give you our rundown of those risks to be particularly aware of. First look for the best landlord insurance cover for your budget.

One potential risk is that despite various landlords’ assumptions, property values are perfectly capable of falling as well as going up. Examples of this include the early 1990s UK residential property market or the property market in Japan, which has been particularly dramatically hit in the recent recession.

However, it is the mortgage with which investors may partly fund the purchase of their properties that poses the greatest risk to them of all. If your investment’s value drops just slightly, this can lead your equity or capital to disproportionately decrease.

The actual performance of the residential property market in the UK has also greatly varied over the years. A general rise in the market in the 1990s and early 2000s has been followed by great regional and property type variations.

Another of the biggest dangers to landlords is the possibility of shortfalls in rental incomes. These can and do occur, and if not sufficiently well planned for, can cripple your business. This problem has a number of possible causes. Firstly, you will not receive rent for as long as you are not able to find a tenant, even though you may still have a mortgage to pay, or indeed in the face of wider competition, you may not be able to command as much rent as you earlier anticipated if you do successfully secure a tenant. The trick to managing this risk is to strike a cautious note in the level of rent that you plan for.

An even more painful shortfall in rental income can occur when for any appreciable period of time at all, the landlord’s property remains un-let.  In this case, the landlord suffers what is known as a letting void. With the Association of Residential Letting Agents (ARLA) stating the average letting void for residential properties to be 24 days as of late 2007, such a period needs to be included in your calculations.

Inflation, meanwhile, is another factor, albeit one that is favourable to landlords. This is because an investor’s biggest ongoing financial burden of all is the mortgage, and over time, inflation effectively reduces the size of the loan. This is because while the mortgage will stay the same, in normal circumstances the value of your property should increase to keep pace with inflation, effectively reducing the size of the loan by the same percentage figure as that by which inflation has risen. The worst thing that could happen to landlords, then, would be low or no inflation or worse, deflation, as occurred in Japan for a sustained period of time, as this would of course effectively increase your loan. Although deflation remains a great improbability in Britain, the risk is always worth bearing in mind.

Regulatory risk also exists. As a landlord, you naturally have to comply with the law as well as fulfil certain obligations to your tenant. The Government has continued to add to its existing legislation over the years to tighten their control of the private rented sector. These changes threaten to diminish your potential rental return from your investment if you do not keep track of new developments and prepare yourself accordingly. Examples include the process of acquiring a House in Multiple Occupation (HMO) license, in which you will be required to extensively modify your property, potentially at the cost of as much as tens of thousands of pounds. Legislation can either introduce prohibitive costs as in this case, or reduce your yields, with increasingly restrictive future legislation naturally an ever-present possibility.

Then there are the potentially differing tax rates to consider, over which the Government has total control. A plan that depends on a particular tax regime remaining as it is in the present runs the risk of being derailed if that tax system ever changes.