How high (or low) is your risk tolerance when it comes to real estate property investment?
Whether you realise it or not, your appetite for risk plays a huge role in how you navigate your property investment journey.
- If you’ve got a high risk tolerance, you’ll likely be more open to taking new investment opportunities that carry a reasonable risk of failure.
- If you’ve got a low risk tolerance, however, you’ll likely prefer to play your investments safe and stick with the tried-and-tested approach you’re familiar with.
The key, of course, is understanding where you sit on the risk tolerance scale – as well as the various factors that influence your risk appetite – to help you make the most informed decisions in line with your real estate investment goals.
As Property Investment Advisory specialists, we’ve put together this helpful guide to provide you with all the information you need to know to understand and manage your risk tolerance in real estate.
Table of Contents
- What is risk tolerance?
- Risk tolerance is different to risk capacity
- What are the different types of risk tolerance?
- Conservative (Low risk tolerance)
- Moderate risk tolerance
- Aggressive (High risk tolerance)
- Several key factors can influence your risk tolerance levels
- Age
- Income
- Investing experience
- Investing goals
- Access to information
- Remember: your risk tolerance can change throughout your investment journey
- Are you looking for guidance in understanding and managing your property investment risk tolerance?
What is risk tolerance?
In a nutshell, risk tolerance refers to the amount of variability you’re willing or comfortably able to tolerate in the potential investment returns of your property portfolio.
As a property investor, your tolerance to risk could mean the difference between taking a substantial risk for potentially significant returns or investing in low-risk options to increase the chances of achieving any return.
Risk tolerance is different to risk capacity
While they may sound similar, your risk capacity actually refers to your ability to handle a loss when investing, based on factors such as your financial situation, your income, what insurances you have in place and your investment goals.
This means that, while you may have a high appetite for risk, this does not necessarily correlate with the risk capacity to absorb a large loss – an important consideration to keep in mind when making real estate investment decisions.
What are the different types of risk tolerance?
There are typically three main risk tolerance levels in real estate investment:
Conservative (Low risk tolerance)
A low risk tolerance means that you are quite risk averse. You would rather play it safe to ensure a better chance of seeing a return on your investment.
A low tolerance to risk should not be considered a bad thing. Many highly successful property investors have achieved financial freedom with a conservative approach to risk.
Moderate risk tolerance
As the name suggests, a moderate risk tolerance is somewhere between the two extremes of the scale.
With a moderate tolerance to risk, you may not necessarily play it safe, but you’re also not about to make a risky investment that could potentially lead to financial stress.
Aggressive (High risk tolerance)
Even if there’s a strong possibility of financial loss, if you’ve got a high risk tolerance, you’re typically still willing to take the risk for the potential returns.
Of course, having a high tolerance to risk does not necessarily mean that you throw caution to the wind.
Many aggressive investors still make informed and calculated real estate investment decisions – they’re simply willing to take greater risks than others may choose to.
Now, let’s discuss the influential factors that go into deciding your type of risk tolerance.
Several key factors can influence your risk tolerance levels
Here are just some of the most important factors:
Age
Typically, younger investors are more willing to take real estate investment risks, as they have more time up their sleeve to recuperate losses.
Older investors, however, are usually much closer to their financial goals and happy to play things safe rather than take unnecessary risks.
Income
Higher-income earners are generally more likely to take on greater investment risk than those on lower incomes who don’t have as much money to play with.
Why? Because they typically have a better chance of recovering from any losses, and may also have a significant cash buffer to fall back on.
Investing experience
Most new real estate investors start quite conservative, as they don’t yet have the experience to manage risks or losses.
Experienced investors, however, can typically tell a smart risk from an unnecessary one. They also better understand the risk management strategies to put in place as well, such as taking out insurance.
Investing goals
Investors with ambitious goals set over shorter timeframes may look for opportunities offering greater returns with a higher degree of risk.
Conversely, investors with more long-term goals may choose to minimise risk and take their property investment journey slow and steady.
Access to information
Investors with access to all available information may still choose to take a risk if they’re confident they’re making an informed decision.
On the other hand, investors struggling to gain access to all the pieces of the puzzle are unlikely to put their money on the line.
There are many other factors that may influence your tolerance to risk as well. It’s important to keep all of these in mind when making your real estate investment decisions.
Remember: your risk tolerance can change throughout your investment journey
As time passes, your appetite for risk in property investment may shift up or down.
Some real estate investors switch to a more conservative approach as they get older and closer to achieving their financial goals, while others may become more aggressive as their income and investment experience increases with time.
This is why it’s so important to reevaluate your type of risk tolerance based on your unique circumstances each time you’re considering a new investment to ensure you’re making the best decision for your needs.
Are you looking for guidance in understanding and managing your property investment risk tolerance?
At inSynergy, our expert team is here to help you.
inSynergy is a full-service and specialist Property Investment Advisory firm dedicated to helping you learn how to use property investment and finance as a tool to build a more secure future.
We provide our clients with a broad range of professional services designed to assist with all aspects of property investment, including property investment education, property investment strategy, finance and mortgage broking, and sourcing high-growth investment properties.
Through every interaction with you, our focus is on helping you to safely build a successful property portfolio and achieve your financial goals without sacrificing your lifestyle.
Get in touch with us today to discover how inSynergy can help you on your investment journey.
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Please note, that this article and the information in it is general and not to be considered as financial advice. However, you can book a meeting with us for personalised advice tailored specifically to you.