Risk is the extent to which you are willing to expose yourself to loss in return for a particular gain. Most homebuyers and property investors wouldn’t consider risk as part of the process of buying property, be it personal risk or even property risk.
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 and your clients need to treat all investments as a business and consider risk as if you or they were a business owner; otherwise everyone is simply gambling.
In my roles as an accredited property investment adviser and a buyer's agent, I frequently come across clients who inform me 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 risk often doesn’t, so they rightfully end up revising their investment strategy to match their personal risk profile.
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.
Given the different types of property, and the fact their varied risk levels aren’t suitable for everyone, it is important to assess your personal risk, just as you would when discussing investing in managed funds or shares with a financial planner.
In addition, property is most often an investor’s most expensive purchase. It is the one they rely on the most to leverage, and to succeed in creating financial prosperity for themselves and their 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 your stress levels to a minimum.
Risk profiles can range from conservative, cautious and prudent to assertive and aggressive.
Desired level of involvement in the buying process can also vary from passive to active. 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. If it is active, then you need to ensure you do a lot of due diligence yourself when investing to mitigate risk.
A word of warning (and some sage relationship advice): when investing, do it according to the person in the relationship with the lowest or most cautious risk profile. That way you can both sleep at night, sustain your relationship and avoid fighting over the financial stresses that occur in many relationships when each partner has different investment and risk profiles and the more conservative partner is pushed past their comfort zone.
Residential, commercial, industrial and short-stay property types all have varying risks associated with their usage (zoning). It’s important that once a property investor has determined their personal risk profile, they research the property type that appeals to them and they understand the risk associated with the property type or associated ‘strategy’ being presented.
Aside from seeking out tailored advice, so many of the different property-related investment ‘strategies’ in the marketplace 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 seem overwhelming.
As always, it’s important to ask the questions that are going to deliver the answers you need to assess if the property being presented matches your risk profile and ticks the ‘sleep at night’ boxes required when investing.
Next month, I will address the third step towards property prosperity, which is developing a documented strategy. Until then, go forth and prosper!