Property Risk v Fear v Reward

We all face it at some point . . that precipice between risk v reward, then dealing with that old monster . . fear. Whether you’re an experienced investor, or it’s your first property, you will need to establish your red, amber and green zones for your view on the risk v fear v reward continuum.

Effort = reward

We know – rationally – there is no reward without effort, and no effort without risk. This can be as small as the risk that your efforts will fail, or worse – that you will lose money, confidence, or something else equally valuable.

So to achieve your goals, you need to take action. Like the saying goes, ‘If you want something you have never had, you must be willing to do something you’ve never done’*. While there’s plenty of advice out there about how to face your fears, the good news is that with property facing your fears can not only be managed, but can also be mitigated.

Real v perceived risk

At The Property Frontline, we are not in the business of ‘convincing’ people to invest in property as we believe that decision should be left to each individual. However, for people who want to invest in property, we help identify the difference between real and perceived risk, and enable them to achieve their goals.

The first step is to get an understanding of what is real risk, and what is perceived risk. For example, a real risk would be to buy property in an area where there is zero chance of price increases, and where the population is plummeting. Perceived risk would be to say that you can’t get a good return through renovations.

It’s personal

Ultimately, only you can decide your level of risk ‘comfort’, and you should not move ahead until you’re ready. Rest assured, your risk level will be completely different to other people you know, largely because we all have different levels of resources and knowledge.

In my personal experience, I found my property fear decreased as my experience and knowledge increased. Initially, I thought the only way to make money in property was to buy a house to live in, renovate it, sell it, then re-use the total funds. I didn’t know I could speed my success by using the equity in my existing property while retaining the property.

Get started

I started out the way I would recommend anyone to start . . . begin with a level you’re comfortable at, and then expand from there. Read, attend seminars, listen to webinars, speak to as many people as you can before you get started to build your level of knowledge.

The short cut is to use a good adviser to help you through the process. If you choose this path, ensure you investigate the adviser and check they have the skills and support service you need.

Mitigation

Let’s not set aside the fact there are real risks in relation to property.  Here, the aim is to identify the risks, then mitigate them. Issues to be addressed include the following.

1. Be clear on your strategy – understand what type of property you need, and what the property needs to do – eg – cash flow, capital growth, yield.
2. Purchase the best property – take an opportunity cost approach to your search by comparing the property you’re considering against others in similar areas (this works really well if someone tries to push you into new property . . . always check the prices of comparable properties in the same suburb).
3. Property performance – research to ensure the property will deliver the returns you’re expecting, ensure there is potential for further uplift, and have multiple exit options.
4. Continuous improvement – conduct regular reviews and monitor emerging changes in your target suburbs.
5. Interest rate changes and unforeseen financial impacts – keep a buffer to ensure you can cover any changes in your income v expenses ratio.
6. Rental returns – use a property manager – a good one. Check their track record and make sure you enjoy dealing with them. If you don’t ‘like’ them, appoint someone else with the skills you need. A good property manager will help you source good tenants, and provide advice on how to manage vacancies if they arise. Of course, buying in an area with low vacancy rates will also mitigate this issue.
7. Damage and other unforeseen issues – obtain insurance including landlord insurance.
8. Renovation or development performance – don’t do the work yourself if you’re not experienced, research service providers and view their work, use good quality contracts, undertake realistic feasibilities before you start the project (and ideally before you purchase the property).
9. Portfolio success – don’t put all your eggs in the one basket, purchase a range of property types that will deliver a combination of cash flow as well as capital growth, ideally in a range of different areas.
10. Portfolio insurance – stress test your purchases against possible changes in circumstances – for example, does the property pay for itself if you lose your job.

Over to you

As mentioned, you are the only person that can determine your level of risk. It’s your life, and only you can be responsible for your personal journey. If you want some help with your property purchases, we are more than happy, skilled and able to help. Call us if you would like to see if we are the best match for your needs.

*A quote from a successful American President, Thomas Jefferson.