Why most Property Investors get it wrong!
What is absolutely clear is that most investors don’t have a methodology to determine their risk exposure. They leave themselves overexposed to predictable issues. We look at the 5 key risks so you can evaluate a potential purchase with an analytical framework for greater certainty.
Do you want to make sure that your investment dollars are going to work hard for you? A good risk consideration does this by taking into account the investment uncertainty vs its opportunity.
Uncertainty is a really, really good definition of risk because it incorporates your personal tolerances as well as the market risks that are involved in any purchase decision.
Have you ever made a purchase and have felt uneasy or uncomfortable, and it turned out to be a lemon? It was most likely your intuitive risk analysis telling you something was wrong. You felt it through your uncertainty or FEAR kicking in.
You may not have been able to identify exactly what was wrong but your gut was telling you that something was definitely not quite right! Take heed of this, because it only occurs when there is something wrong.
In comparison when you made a decision and it felt good then, chances were that you were comfortable with the assessment/analysis that you had undertaken. You were comfortable or happy with the amount of risk you are willing to bear.
Have you ever found yourself unsure? Then this is for you.
There are five major components we need to look at:
Acquisition risk: This determines how the purchase of a property will affect your lifestyle and circumstances. It is more than evaluating the fit for the ideal numbers. It evaluates what happens if you do or don’t make the purchase; and if your ability to hold it changes. It is essential to create a plan to model and understand these impacts.
Finance risk: What finance options are available to you? How do they impact your ability to hold the investment? Do you have contingency funding? This can impact the value of the property you can afford and its location; and hence the performance of your plan
Construction risk: This may not always apply unless you are making a purchase of a house/land package or an off-the-plan apartment or townhouse. When you are, then timing of its delivery, the quality of the builder and the appeal of the end product will have an impact. If it is an existing property a building inspection will analyse its soundness and maintenance status.
Market risk: This is an often overlooked factor. What are the market conditions for the purchase? Will the property value be affected by other properties being developed or sold in the area? What is the relative appeal of the area and the property? Are there changes in Government zoning policy, infrastructure development or local amenities that will impact it positively or negatively?
Sales risk: This is a vital aspect of your plan as it impacts your achievement through the success of your exit strategy. Timing is everything here. You need to be able to sell with a robust and preferably rising market to realise your greatest profits at the desired time. If you need to sell, because of an unforeseen event, and it is against the market there will be less profit and an impact on your goals.
Initially education can reduce uncertainty, however, there is no substitute for quality advice melded into a strong tailored plan. This is the deliverable of good advice, to super charge your results while mitigating your risks.