Risk management is an important consideration when building a property investment portfolio.
Every investment involves risk and every investor should be able to identify their preferred level of risk before they invest. Knowing how much risk you are willing to take on will help you make decisions in an objective and consistent manner.
A qualified financial advisor can help determine where you sit on the risk spectrum. It is not simply a matter of how much risk you can bear before you endure sleepless nights – your risk profile is dependent on a number of factors, all of which need to be considered when planning your property investment strategy.
One factor to take into account is how close you are to retirement, or achieving your financial objectives. Your exposure to risk should be equivalent to how much growth you need in your investments to achieve your goals.
Investors who are a long way from retirement or those close to retirement and in a comfortable financial situation, may wish to scale down their exposure to risk. This will help protect their existing capital. Others, who want to actively build their wealth within a shorter period will likely need to seek higher risk investments to realise potentially higher returns.
The amount of equity you have in existing assets will also have a large bearing on what type of properties you purchase. Leveraging equity to invest is a widely used approach but it is important to know the risks involved, particularly when the strategy incorporates the family home.
It is advisable to have your properties professionally valued on a regular basis to accurately determine your overall equity position.
While equity is one part of the equation, servicing your loans is another ball game.
When assessing your income and your ability to pay off multiple mortgages, ensure you factor in changes that are likely to occur in your personal situation. For example, regular pay rises, an anticipated wage drop, a change in circumstances such as the kids moving out, plans to downsize your home and so on.
Property investors should also consider the extent of their financial buffer. This includes the buffer between your overall income and loan costs – allowing for multiple rate rises and possible tenant vacancies and savings that will help service your loans in the event of a job loss, inability to work or a serious or costly issue with one of your investment properties.
Finally, I would recommend property investors consider the importance of diversifying their portfolio to spread the risk, so poor-performing assets can be offset by better returns on others.
Peter Gianoli joined ABN Group in 2011 to establish Investor Assist. Peter has more than 15 years of experience in the property industry working across some of the country’s premier development projects and throughout his career has overseen the sale and settlement of properties worth in excess of $1bn. Peter is also a highly sought after public speaker and has educated audiences throughout Australia and around the world on topics including property marketing and investment.