Buying property can be an inherently risky game, and purchasers must be aware of these risks to avoid being caught.
The ability to identify and minimise risks is crucial to the success of every property owner.
See here our top six tips for managing your risk when investing in property:
1. Diversify your assets
Diversification is a common strategy used when creating wealth and minimising risk. It involves spreading your equity over the four main asset classes – cash, property, shares and fixed-interest securities.
In property, investors can also diversify within their property portfolio by understanding different features, benefits, risks and returns of different types of property, and ensuring that a good exposure to different types is ultimately achieved.
2. Ensure some liquidity
Liquidity refers to the ability to sell an asset and relates to the time frame taken to do so, and the ease with which it can be done. A commercial property can take a significant amount of time to sell therefore have low liquidity, whereas a residential property is regarded as having a low to moderate level of liquidity. It will take some time to dispose of depending on local market and economic conditions.
You can combat this by using loan buffers against the securities, which are portions of unused loan funds which are in place to cater to times when emergency funds are required. Having such a buffer can go a long way towards reducing the need for a forced sale in the event of financial stress.
3. Cover yourself with insurance
There are a wide range of insurance options available and many of them can be useful in minimising risks.
When purchasing property, you should consider building and contents insurance, landlord’s protection, income protection and life insurance.
4. Don’t try and do everything yourself
Another technique to mitigate some of the risks when investing in property is to engage the services of trained professionals to carry out tasks on your behalf.
These professionals may include accountants, conveyancers, solicitors, building and pest inspectors, quantity surveyors, property managers and qualified property investment advisors.
5. Do your research
Researching your potential property purchase is the paramount strategy for minimising risk.
Effective research can minimise the possibility of buying properties:
- in low (or no) growth areas
- which do not achieve rental growth
- with zoning issues
- with high vacancy rates; or
- with poor cash flow.
6. Know your risk profile
Finally, having an in-depth understanding of your own property risk profile allows you to make wise choices. This is turn reduces many risks.
By completing and understanding your risk profile you will determine an appropriate loan to value ratio (LVR), follow a suitable property strategy, purchase a property type which suits your accepted level of risk, ensure your purchase is aligned to your broader financial goals and create self-awareness regarding your property knowledge.