When investing in property, having a well-researched risk management plan is essential.
Traditional property investment is not generally considered a high-risk investment.
Investors generally believe that researching location and establishing trust structures is all they need to do before investing in property. However, most investors fail to create a well-constructed risk management plan; investing in property without a plan is risky.
Here are some essential risk management strategies to consider when purchasing investment properties.
Risk Management Strategies For Property Investing
Understand The Numbers
Investing in property without fully understanding the numbers is a recipe for failure. Knowing your numbers is imperative because it allows you to analyse the risk factors involved.
Once you know the financial risk, you can adequately assess the viability of purchasing a particular property.
Create a Strategy
Plan your property portfolio, purchasing properties without a proper strategy is unwise.
Your investment portfolio plan should include the number of properties you want to buy, is it financially viable?
How much you plan to spend, loan to value ratios, profit, and loss, expected cash flow for each property. Include taxation, time projections, interest rates, etc. You should review and adjust your strategy annually.
Financial Buffers
Think about it like this, when you buy a car, having some extra money in the bank to cover unexpected expenses is essential. Likewise, when you invest in property, it is crucial that you have some additional money saved to cover unexpected costs. Investing in property without financial buffers is risky business.
Location
The location should undoubtedly be part of your risk management strategy. When searching for potential locations, you should be looking for areas that balance cash flow and capital growth.
Also, make sure the property prices fall in line with your budget; make sure you are looking for locations with properties mid-range prices. Pricing is vital because when you invest in property, it is capital growth that will help you to build wealth.
Diversification
Diversification is critical, plan to purchase properties in different locations. Do not put all your eggs into one basket. Gaining knowledge about property cycles is necessary here.
Research
Conduct extensive research on the location you wish to purchase a property. Delve deep into infrastructure development, population growth, unemployment rates, property prices.
Speak to local business owners, make your projections for the next 10-15 years. Just because purchasing a property in a particular area looks good now does not mean that it will be a good idea in the next 15 years.
Do extensive research to make sure you are making the right decision.
Insurance
Planning for insurance is an essential risk management strategy. Do not just focus on the standard insurance plans such as landlord or content insurance. It would help if you also looked into Life insurance and income protection insurance too.
Advice
If you need further assistance, seek professional help. Trying to do everything on your own is unwise, especially when you are a new property investor.
In conclusion, plan, plan, plan!
You simply cannot build a profitable property portfolio without planning. A risk management plan should include various smaller plans to create a comprehensive property investment risk management strategy that will minimise risk and safeguard you when unexpected issues arise.
Seeking the support and advise of a professional property investment advisor is always a good idea. Property investment is a relatively low risk investment in comparison to other forms of investment. However, it is still essential for you to seek advice in areas that you lack knowledge and understanding.
Creating a concise, well put together risk management strategy will give you a clearer understanding of how the property game works, and it will minimise uncertainty and risk.
