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– The importance of managing risk as an investor
– The benefits of developing a well thought out strategy in line with your goals
We have done it ourselves in the past and we’ve seen many clients do the same too. When things are going well human nature tends kick in and get a little greedy by taking too much on, overcommitting, trying to fast track a strategy, buying three properties instead of two, and then the first speed bump you go over, you almost stop dead or worse, you go backwards. I guess the point I’m trying to get across is, life will always throw you curveballs but it’s how prepared, disciplined and agile you are on your feet, that will determine whether you swing and get a ‘hit’, or you get struck out.
This is not a piece on ‘don’t ever take risks’, its more about the need to identify, prepare, manage and balance risk.
The goal of all investors should be to achieve the best possible return for the least amount of risk hence the key to getting this ‘hit’ or not stopping dead in your tracks is by having a strategy and managing the risk. If you don’t adequately work on a strategy that is aligned with your goals, assess your risk profile and manage your risk before you begin investing, you could end up purchasing a property that will limit your ability to grow your portfolio, or worst case, lose you a lot of money.
Risk comes in different shapes and flavours such as systematic market risk, specific risk and event risk and if you want to be successful, all need to be managed and reduced as much as possible. You won’t eliminate them entirely, but you can do your best to limit your exposure to reduce the probability of something financially crippling happening with your investment journey. Some examples.
Systematic market risk can be interest rate hikes. You can’t affect them or stop them, but you can set your portfolio up so that the effects are minimised should they happen. Before you apply for that investment loan at 4%, stress test your cashflow projections from the potential property and its effect on your personal cash flow or if you have one the entire portfolio at 8% or even 10%. Yes, it’ll probably hurt, but if its manageable then you’ve minimised this risk to a certain degree and you’ll survive should the rates go up.
Specific risk for example, is related to the property itself but the effects in most cases are not really ‘felt’ until it’s too late. This is the risk of acquiring a property that is delivering poor returns or losing money and even possibly exhibiting zero or negative growth. Get caught up in this one, it’s tough to get out of, but not impossible. This is where due diligence and research upfront are paramount and because the financial stakes are so high being a property investor, it is why it’s critical that you get this right from the start. Buying the wrong asset can get you into a whole world of hurt and it’s here where professional help will benefit you the most.
Event risk can be a policy change by the government or a financial regulator, examples such as APRA a few years ago instructing banks to reduce their interest only loans to a set percentage of their entire loan book, or the Labor Government campaigning to reducing/eliminating negative gearing after the ‘unlosable’ election back in early 2019. Again, it’s just the landscape changing and nothing you can do to change it, but you can minimise the impact by assessing how the changes will affect your portfolio and then taking action to suit.
Whilst these examples are just the tip of the iceberg, there are many other risks that effect property investment. For example; liquidity risk, having your cash tied up in property; or personal risk, such as losing a job, going through a divorce or starting a family; or cashflow risks, not having financial buffers in place for vacancy periods, repairs and maintenance.
There are many types of risk that can affect your portfolio but the take-home from all of this is, don’t get bogged down and let this put you off from investing. If you’re aware of what’s involved, be diligent with what needs to be done, be thorough in your research and actions and only then risk can be mitigated. Here’s a basic plan with seven basic steps that will help:
The above is not a guarantee that things will be perfect and trouble free, they just reduce the probability of an undesirable outcome that could evolve into a financial train-wreck. Successful investors don’t just ‘dabble’ in property. They’re in it for the long haul, they have a team by their side, they’re thorough with their research, continually keep learning, and they all have a set strategy they use as their roadmap. Sounds like a simple concept yet overlooked and ignored by many.
The more work you do upfront before you start your investment journey, the less risky your decisions and actions will be. And if things go pear-shaped down the track, they may give you the options you need to be able to ‘chew like hell’ and get over whatever roadblock has been thrown in front of you. But learn from it, stick to your strategy, lean on your team when you need to, and don’t let it stop you reaching your goals.
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