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Risk\u2026it\u2019s everywhere – and it\u2019s a defining factor behind so many rushed or poor decisions. That\u2019s why for anyone looking to become a property investor, the conversation around real estate risk management has to come to light early on.<\/p>\n
You see, if you\u2019re new to property investing, then it\u2019s possible you haven\u2019t evaluated yet what your risk profile is, and how you plan to handle it. Essentially that is, how willing you are to expose yourself to loss, and how you will adapt when things go wrong.<\/p>\n
Real estate risk management is essential to quashing those all-encompassing fears that can follow investing.<\/p>\n
That\u2019s not to say that it will put all those fears to bed at once – even seasoned property investors aren\u2019t immune to fear – but it will help you to learn that having a real estate risk management strategy will alleviate a lot of the pressure and questions you\u2019ll inevitably face in your 20-plus year investing journey.<\/p>\n
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The reason so many people love investing in real estate is because it\u2019s fairly low risk in general compared to other asset classes. For one, it has a long history of good performance in the market.<\/p>\n
Like\u00a0MoneySmart<\/a>\u00a0points out, it also has low volatility compared to other assets because it\u2019s a physical investment – you can see and touch it.<\/p>\n However, there are still elements of risk, particularly financial risk, associated with owning real estate – and that only increases the more assets you buy.<\/p>\n Real estate risk management refers to the systems and safeguards you put in place that will help minimise any losses your investment properties might take on.<\/p>\n The first step here is to understand what is going to keep you up at night the most.\u00a0TRC-Gorod\u2019s\u00a0Head Property Strategist Sam Saggers says that\u00a0there are two things you need to be very honest with yourself about<\/a>:<\/p>\n Figuring out a real estate risk management plan starts with defining whether you\u2019re an investor who completely falls apart when they lose money, or an investor that views it as part of the bigger picture?<\/p>\n Here\u2019s a possible scenario from Sam:<\/p>\n You\u2019ve just purchased an investment property for $500k. However, within six months the value of that property has dropped to $450k due to impacts in the economy outside your control \u2013 like maybe a new variant of coronavirus coming back in full force\u2026<\/p>\n How would you react to that?\u00a0<\/strong><\/p>\n There\u2019s no wrong or right way to react because we\u2019re all very different in the way we\u2019re wired.<\/p>\n However, those who go on to become successful property investors know that to be sustainable in real estate, you have to have a realistic relationship with money – on your terms.<\/p>\n There are typically three different types of investors sitting on the real estate risk management scale: conservative, balanced and aggressive.<\/p>\n Your risk profile will likely fluctuate depending on other factors such as trends in the real estate market, your personal financial situation, or other prominent financial goals you have.<\/p>\n These investors have a lower appetite for risk and as such are more likely to take a conservative approach and invest in low-risk options that are more protected from financial loss.<\/p>\n This could mean investing in real estate that is likely to maintain a steady value, but may not offer higher growth potential.<\/p>\n These investors have a more moderate appetite for risk and are likely to invest in real estate that will steadily appreciate over a long time.<\/p>\n They may also have a balanced strategy if they have multiple properties that balance each other out i.e. a few high growth properties which are offset by more stable, income-producing properties.<\/p>\n These investors have a high appetite for risk and are generally focused on achieving maximum returns from their investment. They are typically interested in growing a profit at a faster rate, focusing on high growth and value add strategies.<\/p>\n This would include people like\u00a0property traders<\/a>\u00a0who typically develop or renovate real estate to build equity and then sell them at a much higher value. These investors would likely need different real estate risk management strategies in place.<\/p>\n <\/p>\n Millionacres<\/a>\u00a0outlines three main ways that property investors may choose to handle risk based on their risk profile:<\/p>\n Investors avoid a clearly defined risk and therefore eliminate it. For example, avoiding unintentional drowning lawsuits by buying properties without pools.<\/p>\n Investors control a risk by having the proper precautions in place from the start, such as a sturdy fence and gate around the pool.<\/p>\n Transferring certain risks can also protect investors and is often used in real estate risk management strategies. In this scenario, taking out insurance that protects you as the landlord of a property against unintentional drowning lawsuits.<\/p>\n <\/p>\n There are four main types of risk associated with real estate.<\/p>\n Financial risk comes in a wide variety of forms; bankruptcy, divorce, death, job loss, debt\u2026any number of things can impact your financial outlook.<\/p>\n Capital is vital to buying an investment property, so it\u2019s important to minimise any risk in your ability to obtain it through lenders, employment and business ventures.<\/p>\n The best thing you can do in real estate risk management is have a smart cash flow plan in place combined with a strong investing strategy to offset any potential risk to your financial situation.<\/p>\n Real estate is not a liquid asset – meaning you can\u2019t just offload it as soon as you need to. Therefore, relying on the money from a sale of a property is not going to be a quick fix for financial trouble.<\/p>\n To offset this type of risk you would want to buy in tightly held capital city suburbs where demand is high but supply is low.<\/p>\n You want to be sure there are a good amount of properties turning over to ensure a liquid market. You don\u2019t, for example, want to buy in a suburb that already has a huge oversupply of apartments if you\u2019re planning on buying your own as an investment.<\/p>\n Generally having a loan is not a risk because you know beforehand what you can afford to take on. However, not being able to repay the interest on that loan if rates were to change IS a risk.<\/p>\n We know that interest rates go up and down – and although they\u2019ve remained at a record low for the past couple of years, the Reserve Bank of Australia has indicated that borrowers remain wary of the\u00a0coming rate rises<\/a>.<\/p>\n Of course it\u2019s possible to mitigate the risk of variable mortgage rates by having things like a cash buffer or an offset account attached to the loan. You could also lock in some fixed interest rates on your properties to help manage the risk.<\/p>\n Learn how to prepare for interest rate rises here.<\/a><\/p>\n Market risk<\/p>\n A lot of the time discussions in real estate risk management are centred around the market. There are a lot of economic factors that affect the market that are completely outside of your control as an investor, like policy decisions and interest rates.<\/p>\n The best thing you can do to reduce market risk is follow the principles of P.I.E: Population, infrastructure and employment. As you choose locations if you follow all three you\u2019re putting yourself in a position to get the best rental growth in the future.<\/p>\n At a wider level, you can also look into supply and demand metrics, yield performance, and demographic trends to ensure you\u2019re buying in a less volatile part of the marketplace. Maintain adequate buffers and insurance policies to offset a drop in yields and\/or damages to your assets.<\/p>\n <\/p>\n Don\u2019t just buy only homes or only units. Different property styles can help you maximise opportunity and thereby minimise risk.<\/p>\n If budget allows, a CBD-based apartment that you fully furnish for short-term letting could be a great way to keep cash-flow coming in. With a house and land package, you might need to move further away from the CBD but that kind of property may experience a lot more capital growth over time.<\/p>\n Just make sure you do your research on what the area demographic is searching for.<\/p>\n Find A-grade properties in diverse locations rather than sticking to the same neighbourhood or even state!<\/p>\n The\u00a0Five Cities Strategy<\/a>\u00a0is a great way to build a strong-performing portfolio. Not only does the compounding effect of having your assets in different marketplaces allow for growth, it also allows for diversification so that your portfolio isn\u2019t just experiencing the impacts of one particular market.<\/p>\n The best tenants need to have enough disposable income where they aren\u2019t impacted by lack of wage growth in the economy and they\u2019re happy to pay more for your property because it fits in with their ideal lifestyle.<\/p>\n Similarly, you want to make sure they\u2019re in a stable industry where things like a global pandemic won\u2019t impact their employment status.<\/p>\n Also look at the rent-to-income ratios of potential tenants. If the rent is going to cost more than 30% of their income then that becomes a red flag considering tenants are likely to have a lot of other expenses they need to pay for.<\/p>\n Basically if you do need to get your hands on some capital quickly, your odds of selling a less expensive property faster are better.<\/p>\n In addition, the number of potential buyers will be larger for less expensive properties than they will be for more expensive ones.<\/p>\n Take note though, this isn\u2019t the same as buying cheap properties BECAUSE they\u2019re cheap. They still need to fit certain criteria in order to be worthwhile investments.<\/p>\n <\/p>\n Even though real estate risk management is crucial to smart investing, it doesn’t mean that real estate itself is unsafe. In fact, it\u2019s a huge advantage!<\/p>\n If you have the right systems in place, you can enjoy increased cash flow, tax deductions, capital growth and solid returns.<\/p>\n Whether you need\u00a0advice on how to combat the fears<\/a>\u00a0surrounding property investing, or you\u2019re just looking for a way to get started on the journey, why not register for one of our\u00a0free property investing seminars<\/strong><\/a>? Held regularly, these high value events will teach you how to approach real estate in a safe and risk-reducing way so that you can focus more on creating long lasting wealth.<\/p>\n Register now for the free property investor webinar<\/strong><\/a> [\/et_pb_text][\/et_pb_column][\/et_pb_row][\/et_pb_section][et_pb_section fb_built=”1″ _builder_version=”4.14.5″ _module_preset=”default” global_module=”17326″ saved_tabs=”all” global_colors_info=”{}”][et_pb_row column_structure=”1_3,1_3,1_3″ disabled_on=”off|off|off” _builder_version=”4.16″ z_index_tablet=”500″ global_colors_info=”{}”][et_pb_column type=”1_3″ _builder_version=”4.16″ custom_padding=”|||” global_colors_info=”{}” custom_padding__hover=”|||”][et_pb_image src=”https:\/\/trc-gorod.ru\/wp-content\/uploads\/2019\/07\/Thumbnail-come-to-a-live-event.png” url=”https:\/\/trc-gorod.ru\/web\/property-investor-masterclass\/” align_tablet=”center” align_phone=”” align_last_edited=”on|desktop” admin_label=”Image: Come to a PIN” _builder_version=”4.21.0″ z_index_tablet=”500″ global_colors_info=”{}”][\/et_pb_image][\/et_pb_column][et_pb_column type=”1_3″ _builder_version=”4.16″ custom_padding=”|||” global_colors_info=”{}” custom_padding__hover=”|||”][et_pb_image src=”https:\/\/trc-gorod.ru\/wp-content\/uploads\/2019\/07\/Thumbnail-subscribe-newsletter.png” url=”https:\/\/trc-gorod.ru\/web\/subscribe-to-our-newsletter\/” align_tablet=”center” align_phone=”” align_last_edited=”on|desktop” admin_label=”Image: Subscribe to the Newsletter” _builder_version=”4.16″ z_index_tablet=”500″ global_colors_info=”{}”][\/et_pb_image][\/et_pb_column][et_pb_column type=”1_3″ _builder_version=”4.16″ custom_padding=”|||” global_colors_info=”{}” custom_padding__hover=”|||”][et_pb_image src=”https:\/\/trc-gorod.ru\/wp-content\/uploads\/2019\/07\/Thumbnail-join-tribe-of-investors.png” url=”https:\/\/www.facebook.com\/groups\/passionatepropertyinvestors\/” align_tablet=”center” align_phone=”” align_last_edited=”on|desktop” admin_label=”Image: Join our Tribe” _builder_version=”4.16″ z_index_tablet=”500″ global_colors_info=”{}”][\/et_pb_image][\/et_pb_column][\/et_pb_row][et_pb_row padding_mobile=”off” column_padding_mobile=”on” admin_label=”Row” _builder_version=”4.16″ background_size=”initial” background_position=”top_left” background_repeat=”repeat” custom_margin=”40px|||” make_fullwidth=”off” use_custom_width=”on” width_unit=”on” global_colors_info=”{}”][et_pb_column type=”4_4″ _builder_version=”4.16″ custom_padding=”|||” global_colors_info=”{}” custom_padding__hover=”|||”][et_pb_text _builder_version=”4.16″ _module_preset=”default” header_4_font_size=”42px” custom_margin=”||0px||false|false” custom_padding=”||15px||false|false” global_colors_info=”{}”]<\/p>\n [\/et_pb_text][et_pb_blog fullwidth=”off” posts_number=”9″ include_categories=”1,65″ excerpt_length=”100″ show_date=”off” admin_label=”Blog Feed” _builder_version=”4.19.4″ header_text_color=”#00afff” body_text_color=”#95989a” body_font_size=”13″ meta_text_color=”#95989a” meta_font_size=”13″ border_width_all=”1px” border_color_all=”#ffffff” border_style_all=”solid” border_width_all_fullwidth=”1px” border_color_all_fullwidth=”#ffffff” border_style_all_fullwidth=”solid” use_border_color=”on” border_color=”#ffffff” border_style=”solid” use_dropshadow=”off” global_colors_info=”{}”][\/et_pb_blog][et_pb_code _builder_version=”4.16″ _module_preset=”default” global_colors_info=”{}”]\n
DEALING WITH MONEY LOSS<\/h2>\n
UNDERSTANDING YOUR RISK PROFILE<\/h3>\n
Conservative<\/h3>\n
Balanced<\/h3>\n
Aggressive<\/h3>\n
HOW INVESTORS MAY DEAL WITH RISK IN REAL ESTATE<\/h2>\n
Risk Avoidance<\/h3>\n
Risk Control<\/h3>\n
Risk Transfer<\/h3>\n
TYPES OF RISK<\/h2>\n
Financial Risk<\/h3>\n
Liquidity Risk<\/h3>\n
Interest Rate Risk<\/h3>\n
REAL ESTATE RISK MANAGEMENT STRATEGIES<\/h2>\n
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IS REAL ESTATE A SAFE INVESTMENT?<\/h2>\n
Investment Property Guide 2023<\/a><\/p>\nRecent Articles<\/h4>\n