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April 12, 2016

Determining your risk management plan

Regardless of your asset class or the size of your portfolio, risk management is non-negotiable.

Property is generally considered low risk but without a well-researched plan, you’re opening yourself up to risks that could have been easily avoided.

Risk management for investing must factor in more than just researching locations and planning repayments; it’s about developing a comprehensive plan to mitigate risk as much as possible.

Every property you purchase needs to have an identified underlying purpose for it to be in your portfolio. And remember, affordability is not a strategy.

When developing your strategy, you need to consider a diverse range of criteria from budget and timeframe to risk profile and the desired outcome of the purchase.

It’s also important to highlight that your exit strategy should be identified prior to you buying the property.

Below are some steps you should take to develop a plan.

Crunch the numbers

The first step when it comes to property investing is always to crunch the numbers.

You need to understand the numbers so you can determine what you can afford to spend – then risk and reward can be measured in monetary terms.

A finance broker can help you find the ideal loan for your budget, circumstances and long-term plans, and give you a clear picture of what you can afford.

Define your strategy

Without a strategy you won’t succeed.

Strategy is the cornerstone of every property portfolio and coincidently every risk management plan – you can’t create a plan without a clear idea of what you want to achieve and how.

Property investing without a strategy is a big risk!

Seek the advice of a property expert to help guide and define your strategy. They’ll be able to provide advice around the most profitable and efficient ways to achieve your goals.

Buffer/contingency plan

Smart risk management planning means you should have a contingency plan in place in case things take an unexpected turn.

For example, it’s important for investors to have an additional buffer (savings) for unforeseen events or financial hardships.

Don’t put all your eggs in the same basket

Understanding property cycles, location and other influencing factors is key when it comes to risk management.

You need to ensure you invest only in properties you truly”‘understand” and that have identifiable demand for tenants and capital growth indicators.

A diverse portfolio, spread across a number of property types and cities, will ultimately be less risky then investing solely in one large property development, for example.

Seek advice

A professional property expert is always going to be beneficial – not just in finding the right type of properties for your portfolio but also in helping you understand the risks and benefits of each one in relation to your circumstances.

And the classic and often costly mistakes you’d make “going it alone” will be avoided.

About Paul Wilson

Paul Wilson has more than 15 years’ experience as a successful property investor and mentor. He is best known as the founder and director of We Find Houses, We Find Finance and Educating Property Investors.