Don't Bite Off More Than You Can Chew
Don't Bite Off More Than You Can Chew
When it comes to investing in property, don’t bite off more than you can chew, but if you do, chew like hell.
We've done it ourselves and seen many clients do the same too. I guess the point I’m trying to get across is, life will always throw you curveballs but it’s how prepared, disciplined and agile you are on your feet, that will determine whether you swing and get a hit, or you get struck out.
The goal of all investors should be to achieve the best possible return for the least amount of risk hence the key to getting this ‘hit’ is by having a strategy and managing your risk. If you don’t adequately work on a strategy that is aligned with your goals, assess your risk profile and manage your risk before you begin investing, you could end up purchasing a property that will limit your ability to grow your portfolio, or worst still, lose you a lot of money.
Risk comes in different shapes and flavours such as systematic market risk, specific risk and event risk and if you want to be successful, all need to be managed and reduced as much as possible. You can't eliminate them entirely, but you can do your best to limit your exposure to reduce the probability of something financially crippling happening on your investment journey. Some examples:
Systematic market risk can be interest rate hikes, you can’t affect them or stop them, but you can set your portfolio up so that the effects are minimised should they happen. Before you apply for that investment loan at 4%, stress test your cashflow projections for the potential property and its effect on your entire portfolio at 8% or even 10%. Yes, it’ll probably hurt, but if it's manageable then you’ve minimised this risk to a certain degree and you’ll survive should rates go up.
Specific risk, for example, relates to the property itself but the effects in most cases are not really ‘felt’ until it’s too late. This is the risk of acquiring a property that is delivering poor returns or losing money and even possibly exhibiting zero or negative growth. Get caught up in this one and it’s tough to get out of, but not impossible. This is where due diligence and research are paramount and because the financial stakes are so high as property investor, it’s critical that you get this right from the start. Buying the wrong asset can get you into a whole world of hurt and it’s here where professional help will benefit you the most.
Event risk can be a policy change by the government or a financial regulator, examples such as APRA a couple of years ago instructing banks to reduce their interest only loans to a set percentage of their entire loan book, or the Labour Government possibly reducing or eliminating negative gearing after the upcoming election in a few months. Again, it’s just the landscape changing and nothing you can do to change it, but you can minimise the impact by assessing how the changes will affect your portfolio and then taking action to suit.
While these examples are just the tip of the iceberg, there are many other risks that affect property investment. For example; liquidity risk, having your cash tied up in property; or personal risk, such as losing a job, going through a divorce or starting a family; or cashflow risks, not having financial buffers in place for vacancy periods, repairs and maintenance. There are dozens of risks that can affect your portfolio but the take-home from all of this is, don’t get bogged down and let this put you off from investing. If you’re aware of what’s involved, be diligent with what needs to be done, thorough in your actions, then risk can be mitigated by the below five basic steps:
- Have a strategy before you start your investment journey
- Do your research and due diligence thoroughly
- Educate yourself and always keep learning
- Get professional help if you need it and build yourself a team of experts
- Have the right disciplined mindset, then back yourself and take action
The above is not a guarantee that things will be perfect and trouble free, they just reduce the probability of an undesirable outcome that could evolve into a financial train-wreck. Successful investors don’t just ‘dabble’ in property. They’re in it for the long haul, they have a team by their side, thorough with their research, continually keep learning, and they all have a set strategy they use as their roadmap. Sounds like a simple concept yet overlooked and ignored by many.
The more work you do upfront before you start your investment journey, the less risky your decisions and actions will be. And if things go pear-shaped down the track, they may give you the options you need to be able to ‘chew like hell’ and get over whatever roadblock has been thrown in front of you. But learn from it, stick to your strategy, lean on your team when you need to, and don’t let it stop you reaching your goals.