One of the cardinal rules of investing, regardless of asset class, is to ensure that you have a researched risk management plan. Property is generally considered low risk, and many investors naturally look at mitigating risk by researching location, setting up trust structures, etc… but few look at a comprehensive and structured risk management strategy. The main elements of a proper strategy are:
When structuring a strategy and a financial plan, an investor should always ensure that they have 'buffers' in place.
If releasing equity in a property to invest in a new one, make sure that you do not use all of the equity to purchase the property. Keep a comfortable amount available to cushion against unexpected expenses, interest rate rises, etc… We also recommend that investors have an additional buffer, usually in the form of savings in an offset account for personal expenses (medical emergency, car purchase, holidays, etc.). The quantum of these buffers will depend on many factors, but as a simplistic example, we would recommend at least a $50K 'investment' buffer when buying a $400K-$500K property.
This is the obvious broad ranging tool that any investor would be crazy to ignore. Insurance covers:
This subject can become complicated and using a good insurance broker is paramount.
As a risk management tool, an investor needs to find economically diverse locations that balance cash flow and capital growth, stay in the middle of the price range, keeping in mind that what will create wealth is capital growth.
Cash Flow Management
Investing in property is a numbers game. In order to make a decision on the acquisition of an investment property, it is essential that an investor understands what impact this property will have on his/her cash flow. It would be reckless to invest in a property that turns out be cash flow negative by an amount the investor cannot afford. Also cash flow projections need to be reviewed against actual figures regularly to ensure that there is no slippage. Research in costs/revenue is important.
It sounds elementary but many people do not know where to start and how to analyse these cash flow numbers.
The above are only a few important considerations, but there are many more relating to financing, legal structures etc… The best risk management decision an investor can ever make is to seek professional help in this field. Doing it alone is certainly a risky plan…