How well do you manage risk as a property investor?
When investing in real estate, it’s easy to get caught up in all the benefits along the way:
- You own one or more great properties in ideal locations
- You’ve got high-quality tenants looking after your investment
- You’re watching the money flow straight into your bank account each week
- You’re moving closer to achieving your financial goals
Sounds like a dream, right?
But what if something unexpected happens?
As with all kinds of investment, there are always certain risks involved when it comes to investing in property – and when left unmanaged, these risks have the potential to cost you significantly.
That’s why it’s so important to ensure that you’ve got the right planning and risk management strategies in place, and that your property portfolio is fully prepared to handle anything that may be thrown at it.
To help you make an informed decision about the best risk management strategies for your situation, we’ve put together this comprehensive article outlining several key strategies that you might consider adopting as part of your broader investment approach.
Let’s get started.
Table of Contents
- First, what are the risks of property investment?
- The importance of understanding your risk tolerance
- Risk Management Strategy 1: Build a team of trusted experts you can turn to for professional advice
- Property Wealth Planner
- Accountant
- Lawyer
- Property Manager
- Buyer’s Agent
- Risk Management Strategy 2: Do your research and due diligence
- Research is key to minimising uncertainty
- Risk Management Strategy 3: Build a cash buffer
- How much cash should you put aside?
- Risk Management Strategy 4: Have the right insurance in place
- Property Insurance
- Personal Insurance
- With an expert team by your side, you can learn how to grow your wealth and invest in property safely.
- Do you need help learning how to safely build your property investment portfolio?
First, what are the risks of property investment?
As mentioned earlier, all investment comes with its own set of risks attached. Often, these risks are unique to the type of investment itself.
For example, investing in the stock market naturally carries different risks than investing in or buying a business will.
This means that, when it comes to property investment, there are certain investment property risks that you need to be aware of so you can prepare yourself as a real estate investor and enjoy a successful property investment and management journey.
This includes understanding how to navigate:
- Extended vacancy periods
- Unforeseen expenses
- Interest rate increases
- Personal risks leading to income loss
Luckily, many effective risk management strategies can be implemented to protect your property portfolio against each one of these risks and more to help keep you on the right path towards achieving your financial goals.
The importance of understanding your risk tolerance
Before we continue, one important consideration to make when investing in real estate is that you will have your own level of risk tolerance – the amount of risk you’re comfortable taking on as part of your property portfolio.
Understanding your level of risk tolerance is key to helping you determine the best real estate risk management strategies to consider implementing to give you the greatest peace of mind.
There are three main levels of risk tolerance:
- Conservative
- Moderate
- Aggressive
Of course, several factors influence your risk tolerance, and the level of risk you’re comfortable with can change throughout your investment journey, so it’s important to revisit this regularly to ensure you still have a clear understanding of where you fall on the scale.
Now, let’s review some of the most important strategies for you to consider when looking to manage property investment risks on your journey.
Risk Management Strategy 1: Build a team of trusted experts you can turn to for professional advice
Seeking professional advice is, without doubt, one of the simplest strategies to help you bridge the gap between uncertainty and confidence in the Australian property market.
With a team of property and financial specialists by your side, you’ll have access to the comprehensive investment property education that you need to help you make the most informed decisions – in line with your individual financial goals.
The right experts will work alongside you to develop the ideal strategies and financial structures to help minimise your risk and maximise your potential for investment success.
Let’s outline some of the key players that you should consider adding to your team:
Property Wealth Planner
An expert property wealth planner will work with you to help you understand how property investment and mortgage debt can work as powerful tools for wealth creation.
Using proprietary research and key market insights, they’ll create a personalised property investment plan that aligns with your overarching goals and offers a clear vision for your future financial growth to help you make informed decisions going forward.
This plan could include strategies such as:
- Rentvesting: buying an investment property in a more affordable area primed for high growth while continuing to rent in your dream location.
- Leveraging equity: accessing the available capital in your existing home or investment property to help fund the purchase of your next property.
Accountant
An accountant is key to helping you understand the many different financial and tax obligations that you will have as a property investor.
Likewise, they will also be able to guide and assist you in taking advantage of the various tax incentives available to real estate investors, such as negative gearing, discounts on capital gains tax and many more.
Lawyer
Having a lawyer by your side – in particular, a lawyer skilled and educated in property law – is a great asset to your property investment journey.
They can assist you with all the legal aspects of buying, managing or selling an investment property, as well as advise you of your legal obligations along the way, to ensure that you remain fully compliant and help reduce the risk of straying beyond the law.
Property Manager
As a property investor, an expert property manager is easily one of the most invaluable resources available to you.
They can take care of all property-related tasks for you, from finding the right tenants to conducting inspections, organising maintenance and so much more.
A property manager will prove particularly useful once you begin to expand your portfolio and branch out to other states or cities as well.
Buyer’s Agent
Finding the perfect investment property can be a daunting task, but with a buyer’s agent by your side, you’ll easily be able to find the ideal property to kickstart or continue your journey towards achieving your financial goals.
Whether you’re looking to purchase locally or interstate, a buyer’s agent can take care of everything for you, from narrowing down the best properties to attending inspections and completing the sale.
They’ll even provide access to unique off-market opportunities that no one else knows about – helping to give you an edge in building a great property portfolio.
Of course, there are many other experts that you can speak to as part of your investment journey to get the best advice for your unique situation and help ensure the greatest chances of success.
Ultimately, who you choose as part of your expert team will depend on your individual knowledge, goals and circumstances.
Risk Management Strategy 2: Do your research and due diligence
The power of research cannot be overstated. In fact, conducting research is one of the most critical elements of a successful property investment journey.
Whether it’s looking for:
- the best locations to invest in,
- the best property financing options available, or
- the best experts to help you on your journey,
Doing your research and due diligence is paramount to helping you minimise risk from the outset by enabling you to identify and prepare for these risks before jumping in.
As an example, some locations in Australia will be far more geared for growth than others, based on factors such as infrastructure, job opportunities, access to schools and amenities, and much more.
Conducting research to identify these areas can help to minimise certain risks, such as the risk of extended vacancy periods.
Of course, a buyer’s agent can help with much of the research phase when it comes to finding the ideal investment property, but there are still many other elements of your journey that will be made much easier simply by doing your due diligence.
Research is key to minimising uncertainty
Research is particularly useful for those of you who consider yourselves risk-averse investors and are looking to minimise your uncertainty or discomfort. Doing your due diligence will ensure that you’re as prepared as possible for whatever may come.
Risk Management Strategy 3: Build a cash buffer
One of the most popular strategies for risk management that many property investors will adopt is building a solid cash buffer that they can rely on to back them up financially when unforeseen expenses or circumstances arise.
Needless to say, if you’re not prepared or don’t have the financial resources available to cover these unpredictable expenses, they can potentially threaten the progress of your investing journey – making it difficult to stay on track with achieving your financial goals.
A few examples of these kinds of unforeseen expenses or circumstances include:
- Extended and/or unexpected vacancy periods
- Periods of tight cash flow management
- Interest rate increases that lead to higher mortgage repayments
- Unexpected maintenance required on your property
That’s why a cash buffer is so important.
How much cash should you put aside?
Ultimately, the size of your cash buffer will largely depend on a few key variables:
- The size of your investment property portfolio – the more properties you own, the greater the likelihood of these unexpected expenses coming up, and the more prepared you should be.
- Your level of risk tolerance – if you’ve got a conservative risk tolerance, you may choose to err on the side of caution and build a larger cash buffer than those who are more aggressive in their approach to risk.
- Your risk capacity – unlike risk tolerance, your risk capacity refers to your ability to deal with these unforeseen financial hurdles. This can be determined by factors such as your income and financial situation.
- How many other financial risk management strategies you may already have in place
These are just some of the factors that you will need to consider when determining how small or large your cash buffer needs to be.
Risk Management Strategy 4: Have the right insurance in place
With so many different types of insurance these days, it’s easy to become confused about which policies are worth purchasing when investing in property.
When it comes to property investing, there are two types of insurance that are both absolute musts for all investors:
- Property Insurance
- Personal Insurance
Let’s look at both in more detail.
Property Insurance
Property insurance, such as Building Insurance and Landlord Insurance, is crucial in helping to protect your financial position and ensuring that you always have access to the funds you need when something happens to your property – whether at the hands of your tenants or mother nature.
The right property insurance can cover you for situations such as:
- Theft or damage by tenants
- Damage from natural disasters (storms, fires, floods, etc.)
Of course, these kinds of unexpected expenses can be difficult to cover without the right insurance, so it’s always best to consider how this type of insurance may assist you when investing in real estate.
Personal Insurance
Personal insurance, such as Accident and Illness Insurance and Income Protection, does not necessarily cover your investment property.
Rather, it works to protect your financial situation in the event that you lose your income and your ability to continue servicing your mortgage or paying property expenses.
If you were to lose your job, suffer an injury or develop a long-term illness, this could have a substantial impact on your property investment journey without the right personal insurance policies in place to back you up.
Of course, like each of the other strategies we’ve discussed today, the amount or type of insurance that you choose to purchase will largely depend on your level of risk tolerance – and it’s always best to discuss your insurance options with an expert to help you make an informed decision.
With an expert team by your side, you can learn how to grow your wealth and invest in property safely.
While the strategies we’ve outlined today are all essential to the success of your property investment journey, they are by no means the only planning and risk management strategies available to you.
So, if you’re looking for expert assistance to start or continue your investment journey using the best strategies and approach, look no further than our expert team at inSynergy.
Do you need help learning how to safely build your property investment portfolio?
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.
—
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.