Risk Management Strategies For Property Investors
Property is one of the best wealth creation vehicles available to investors. It has a solid history of strong performance and is a relatively low-risk asset class.
However, like all investments, there is an element of risk when buying property and building a portfolio.
Few investors look at developing a robust and structured risk management strategy, and that can be a formula for risky business. So, here is my list of the key risk management tools that will help you minimise your risk and exposure:
- Build a strategy
- Interest rate risk
- Market risk
- Cash flow management
- Landlord insurance
- Seek advice
Build a strategy
Understand your numbers and your exit strategy! Investing in property is a numbers game, so you need to know them inside out. Planning a portfolio is crucial in managing risk. Your strategy should address your appetite to risk, the types of properties you will accumulate, your personal cashflow position, your desired end goal etc. Having a robust strategy from the get-go and understanding your numbers is key in managing unforeseen risk.
Interest rate risk
Have an investment savvy mortgage broker as part of your overall team of professionals. A good one is worth their weight in gold! Knowing when to go fixed vs. variable interest, how to use offset accounts, when to choose interest only vs. principle and interest loan products are all crucial factors when building a portfolio. Investing is a game of finance i.e. without it you are unlikely to be able to invest. Having the ability and foresight to manage your interest rate exposure is crucial.
Here I am talking about the risk of the property market crashing, and currently, there are plenty of scaremongers and pessimists predicting a property crash! Even though the capital city markets of Sydney and Melbourne have cooled down, an all-out crash is highly unlikely.
A strategy to mitigate market risk is to buy investment grade properties that have a long history of performance and are well located in populated areas within close proximity to a major CBD or employment hub. Building your equity by buying under intrinsic value as well as manufacturing equity in your properties via renovation can also reduce your exposure to market risk.
Cash flow management
Investing in property is a numbers game. In order to make a decision on the acquisition of a property it is essential that you understand what impact this property will have on your cashflow. After all, you will have to cope with the property’s cashflow for a significant period of time.
It would be reckless to invest in something that turned out to be cashflow negative by an amount that you could not afford. Cashflow projections should always be reviewed against actual figures to ensure there is no slippage.
Having adequate cash buffers is extremely important when investing in property, more so when you have a portfolio of properties. Having access to cash or redraw facilities gives you peace of mind and the ability to fund extraordinary costs related to your properties i.e. hot water system replacement, air-conditioning units, tenant vacancies.
Landlord’s insurance is one of the most important purchases a property investor can make. For an outlay of a few hundred dollars a year, you can be covered for not only damage to buildings and contents, but also for rental default and damage by tenants.
Above I have covered some of the important considerations, but there are many more relating to financing, structuring, asset protection etc. In my view, one of the best risk management strategies an investor can put in place is to seek advice from professionals.
- Strategic advice from property strategist and buyers agent
- Interest rate risk advice from an investment savvy mortgage broker
- Market risk advice from a buyers agent
- Cashflow management advice from an investment savvy accountant
- Insurance advice from an insurance broker
There are some great experts out there available to help you manage risk when investing in property, it’s a matter of teaming up with the right ones.