Risk and property investing
It’s important as Advisors when working with your clients, that you help them to understanding that risk is very much a factor to be taken into consideration when buying direct property.
As you know, risk is the extent to which someone is willing to expose themselves to loss, in return for a particular gain.
Most home buyers and property investors wouldn’t consider risk as part of the process of buying property, be it personal risk or even property risk for that matter.
When establishing or growing a property portfolio, your client’s need to treat all investments as a business and consider risk as if they were a business owner. Otherwise everyone is simply gambling.
It is essential clients understand the relevance of risk during the establishment or growth of their property portfolio as a means of managing and/or mitigating it. At a minimum, it will enable them to make more informed and appropriate investment decisions from the outset and at best it will save them from losing tens or hundreds of thousands of their hard earned equity or savings.
Given the different types of property, and the fact that their varied risk levels aren’t suitable for everyone, it is important that clients assess their personal risk, just as they would when discussing investing in managed funds or shares with their Advisor.
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 their risk profile when purchasing property – this ensures they have the best opportunity for their investment to succeed, as well as keeping their stress levels to a minimum.
As you know, risk profiles can range from conservative, cautious and prudent to assertive and aggressive.
Clients can also assess their desired level of involvement in the buying process, which can also vary from passive to active. If their desired involvement level is passive then it is imperative they engage the services of a professional who can provide evidence of their expertise in the area in which they need assistance, and if it is active, then they need to ensure they do a lot of due diligence themselves when investing to mitigate risk.
Property Usage and Risk
Residential, Commercial, Industrial and Short Stay property types all have varying risk associated with their usage (zoning). Even buying property off the plan is high risk, as there are many parts of the development process to be effected before the OTP property is completed and many elements that can go wrong and affect the investor adversely.
In my professional capacity, I frequently come across clients who inform me that 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’s important that once a property investor has determined their personal risk profile, that 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 market place are aligned with developers, property spruikers, wholesale distribution channels and selling agents. This can make it knowing which way to go and what’s right for them seem overwhelming.
As always it’s important they ask the questions that are going to deliver the answers they need to assess if the property being presented matches your risk profile(s) and ticks the ‘sleep at night’ boxes required when investing.*
*Some of the article content is extracted from the book Property Prosperity – 7 Steps to Buying Like an Expert by Miriam Sandkuhler © 2013, with the authors permission
Miriam Sandkuhler is the founder of Property Mavens - a specialist property advisory firm based in Melbourne.
Unlike most ‘Property Advisors’, Miriam is an Accredited Property Investment Advisor (PIAA), Licensed Estate Agent and REIV member and award nominated Buyer Agent, with 15 years of real estate experience in two states. She is also the author of the book Property Prosperity.
Miriam and her team excel at identifying high-performing property and strategically building a client’s portfolio with high capital and income growth assets. She is also a passionate advocate of fair play for all and complete accountability and transparency in the real estate industry. She has a strong track record helping investors and home buyers and believes education is the key to empowering people on their journey to achieving their goals.
Miriam is a regular real estate and investment media commentator and has published articles in Australian Property Investor, Property Observer, Smart Property Investment and Your Investment Property magazines, as well as having appeared on radio and in metro daily newspapers.