20-Step checklist and step-by-step guide to creating a professional and effective property risk mitigation plan.
Let’s talk about strategies to avoid, accept, reduce, control or transfer risk. If you are serious about becoming a property investor, then finding the right strategy for you is essential!
The steps or strategy that you take in order to reduce risk is called risk mitigation. It’s important to develop a plan specific to you or your company to ensure its continuity. If you aren’t looking at strategies on how to reduce, eliminate or accept risks when investing in property, then you are already doing yourself or your business damage.
You need to be able to identify how each activity relates to mitigating risk. And, if it does not, be able to reconsider prior to accepting or moving forward with that property investment.
In order to assist you with this, we have developed this checklist designed to help you create your own property investment risk mitigation plan. It will also additionally assist you in creating plans or actions for specific risks within your organisation or industry.
Property Investment Risk Mitigation Checklist:
1. Maximise Your Borrowing Power
- What can you do to increase income, reduce personal expenses and eliminate high-interest consumer debt?
2. Get Finance Ready
- Find a financial planner or finance professional that specialises in property investment in order to determine the appropriate amount to borrow.
3. Set Up Your Investment Structures
- Find an accountant that specialises in property investment, discuss your plans and set up the appropriate asset structure.
- Do you need to separate business investments from your personal investments?
- Will you purchase in your name, in an SMSF or a family trust?
4. Insure Against Risk
- Review your insurance cover.
- Consider your requirements: home, contents, life, income, professional liability risk, etc.
5. Decide What Types of Investments are Best for You
- Decide what types of real estate are the best investment choice for you.
- Consider the different types of dwellings and tenancy types carefully.
- As well as your amount of available time and level of expertise.
6. Set Up Your Systems
- You need to think of property investment like a business, with income, expenses, customers, suppliers, assets and liabilities. As such, you need to set up a streamlined and integrated portfolio management, accounting and banking systems. This will help to reduce stress, keep yourself organised, save you time and help you maximise your return on investment.
7. Set Your Buying Rules
- What is your buying power?
- Are you planning to purchase one large investment or a number of smaller value investments?
- What are your capital growth goals?
- What yields/cashflow do you need to achieve?
8. Decide Where You Want to Invest
- Identify the location you want to invest in.
- Click here to read more about how to research potential investment locations.
9. Identify a List of Potential Investment Properties
- Search the market for potential properties within your identified location, dwelling type and tenancy type. Identify the ones that meet your financial goals and create a shortlist for further research.
10. Research Your Investment Shortlist
- Research the specific suburbs current and historical performance. Then, investigate the property itself.
11. Analyse the Numbers
- What is the: asking price, estimated valuation, the length it’s been on the market, amount the current owner paid and length that they have owned it?
- Check recent comparable sales in the location.
- Complete a growth and cashflow forecast. How will it perform over 10 years, how much equity with it require and what do the total returns (IRR) look like?
12. Fine-Tune Your Research
- From your list of shortlisted properties, contact the seller/agent and discover as much information as you can about (make notes!):
- What is the owner’s motivation to sell and their deadlines?
- Is it going to auction, has it been passed in, can you negotiate a sale agreement?
- Who are the current tenants, what are the terms of their current lease and when were the rents last reviewed?
- What are the defects and improvements to the property?
13. Negotiate/Bid on the Property
- If buying at auction, make sure your finance is ready, you have established a maximum purchase price and completed your due diligence. If negotiating by contract, make sure you work out the contract conditions that you want to insert (finance, inspections, settlement date, etc.).
14. Contract Completion
- Once you have a contract to purchase that’s conditional on terms/clauses, you need to move quickly to meet the agreed deadlines. These include:
- Registered valuations, final finance approval and the issue of documents, building and pest reports and any other items you have identified in the contract.
- Make sure to continually and repeatedly follow up with lawyers, financiers, real estate agents, property managers and other specialists as needed.
15. Review Your Property Management Plan
- How are you going to manage the property? Are you self-managing, using an existing property manager or recruiting a new one?
16. Organise as You Go
- Once the settlement is secured, make sure your accounting and investment portfolio systems are updated with the final purchase cost and mortgage details.
- Make sure income and expenses are going in and out of the correct accounts.
- File all purchase-related documents for tax purposes in one location.
17. Set Your Depreciation Schedule
- Discuss with your property accountant a depreciation schedule, so that you can ensure that you maximise the full tax deductibility of the depreciating items in your investment property.
18. Complete Improvements and Rectify Defects
- Repair/replace your previously detected defects within the property. Mark any future improvements with estimated dates of repair/replacement.
- Congratulate yourself on your new property investment.
20. Calculate When You Will Be Ready to Invest Again
- Review your updated portfolio, meet with your finance professionals and work out when you will be in the position invest again.
The purpose of this checklist is to guide and support you through the reviewing, developing and updating of your procurement framework. Our aim is to encourage self-assessment and provide you with a starting point for implementing risk mitigation strategies.
Finding the right strategy for you is essential. If you find some steps more or less essential to you personally, then make sure to amend our checklist accordingly so that it suits you.