Understanding Property Investment Risk
Now that you understand that free advice isn’t free or good advice, let’s assess property investment risk.
Risk is the extent to which you are willing to expose yourself to loss in return for a particular level of gain. The higher the risk, the higher the gain … in theory.
In movies and the media, people are applauded for taking big risks. They scale mountains, topple governments, reveal conspiracies, get the guy (or girl) and live happily ever after.
In property investment, not so much. When establishing or growing a property portfolio, you need to treat your investments as a business and consider risk as if you were a business owner. Otherwise you’re simply gambling.
It’s important as an investor to understanding that risk is very much a factor to be taken into consideration when buying property. It is rarely ever talked about or considered by most investors and home buyers.
There are two types of risk to consider when buying property – personal risk and property (strategy) risk.
Most home buyers and property investors wouldn’t consider risk as part of the process of buying property, however it is essential to understand the relevance of risk during the establishment or growth of your property portfolio as a means of managing and/or mitigating it. At a minimum, it will enable you to make more informed and appropriate investment decisions from the outset and at best it will save you from losing tens or hundreds of thousands of your hard earned equity or savings.
Property is most people’s most expensive purchase in their lifetime. It is the one you rely on the most to leverage, and to succeed in creating financial prosperity for yourself and your family. It would be remiss to not understand your risk profile when purchasing property – this ensures you have the best opportunity for your investment to succeed, as well as keeping their stress levels to a minimum.
In my roles as an Accredited Property Investment Advisor and Buyer’s Agent, I frequently come across clients who inform me that they have a low to moderate risk profile, but they want to get into property development. However, they don’t understand that property development is a high risk strategy. While the potential returns of developing appeal, the high risk often doesn’t, so they rightfully end up revising their investment strategy to match their more conservative risk profile
Risk profiles range from being conservative, cautious and prudent to assertive and aggressive.
This is a person’s desire to take action. Someone with a low risk appetite may be satisfied with buying only one investment property, whereas someone with a high risk appetite may want to buy ten or more.
It’s not just the quantity to consider, but the level of due diligence an investor is willing to perform to obtain their desired outcome. Due diligence is the degree of care and research, investigation and risk mitigation you are willing to do to protect your interests when purchasing property.
Conflicts arise when a person with a low risk profile has a high risk appetite. If they are naturally conservative or cautious and fear taking action, it is unlikely they will achieve their objective regardless of their desire. This is where working with a buyer’s agent can help them achieve their goals as they can mitigate risk.
Conversely, someone with a high risk profile and high risk appetite is likely to race out there and accumulate as much property as possible as quickly as possible, while possibly foregoing due diligence in the process.
Level of involvement
If your involvement level is passive then it is imperative that you engage the services of a professional that can provide evidence of their expertise in the area in which you need their assistance, such as a buyer’s agent and if it is active, then you need to ensure you do a lot of due diligence yourself when investing to mitigate risk.
Passive – engage professionals to do the work for you
Medium – engage professionals to do the work for/with you
Active – do the work yourself and use professionals to check your work
Property Usage and Risk
Residential, Commercial, Industrial and Short Stay property types all have varying risk associated with their usage (zoning). Even buying property off the plan is high risk, as there are many parts of the development process to be effected before the OTP property is completed and many elements that can go wrong and affect the investor detrimentally.
It’s important that once you have determined your personal risk profile, that you research the property type that appeals to you and you understand the risk associated with the property type or associated ‘strategy’ being presented.
Aside from seeking out independent advice, many of the different property-related investment ‘strategies’ in the market place are aligned with developers, property spruikers, wholesale distribution channels and selling agents. This can make knowing which way to go and what’s right for you confusing and overwhelming.
As always it’s important you ask the questions that are going to deliver the answers you need to assess if the property being presented matches your risk profile(s) and ticks the ‘sleep at night’ boxes required when investing.
Some of the article content is extracted from the book Property Prosperity – 7 Steps to Buying Like an Expert by Miriam Sandkuhler © 2013, with the author’s permission