- Vital for investors to understand their risk profile
- Should include your age, work, financial position and prospects
- Risk profiles need to be regularly updated
Now I know this might not sounds very compelling, but I can’t stress enough how important this is.
All property investors need to have a very close understanding of their own particular risk profile.
There are some very clever and skilled sales people out there, and it’s easy to get excited by the prospects property investment provides, particularly given the strong returns of recent times.
But – as well as going up, the market can go down, and it can cause devastating issues for those not properly prepared.
So while property can be one of the safest ways to invest money, you can also get it really wrong if you’re not careful – and lose a lot of money in the process.
One of the most important things to consider as a first time investor is the proper analysis of your own particular risk profile.
This should be considerations around your age, your work, your financial position and prospects – including your existing equity or deposit – all needs need to be included.
These things and more need to be taken into account, and accurately analysed in realistic detail, to determine exactly what level of risk is suitable and comfortable for your circumstances.
And when I say “level of risk” I mean things like the potential cashflow of a property, the age of the property, the area that the property is in can be a risk.
There are risks, such as buying in the wrong market at the wrong time, or over-extending yourself.
A drop in house prices can leave you in a position of negative equity, meaning that the money you owe on a property has become greater than the current value of the property itself.
There is an argument that property investing is safer than the stock market because the property will always be there no matter what.
Given this, many feel they can ride out any downturn in the property market, if they keep their eye on the longer term vision.
Nonetheless, first time and experienced investors need to assess their risk profile to work out how they will manage if things go badly economically either for themselves or the economy as a whole.
If you don’t adequately assess your risk profile using the guidance of an experienced and qualified property adviser you could easily end up purchasing property that restricts your capacity to grow your portfolio in the future.
If you end up buying a high risk investment that turns bad, you can end up in real trouble both financially and emotionally.
Sadly one of the big issues for first time investors is when they haven’t done enough due diligence or know the market or industry well enough. As beginners this is the biggest risk for investors trying to do it alone.
The first property you buy can often make the biggest impact on your overall property portfolio success.
If it goes wrong people often don’t have as much back up to access cash and can end up losing a large chunk or all of their investment, if they are stuck with no way to pay their bills, mortgages and costs.
It’s not just the property market dropping – you must also consider potential issues such as your health or the health of your partner or family.
In this case building in a financial buffer is important to help you deal with any unexpected circumstances. Losing your job is another risk of course. Allowing for the fact that this might happen means you can plan for it in advance.
Cash is king
Managing your cash flow is very important – keeping a budget and getting to grips with the what-ifs, and being quite aware of risk, means you can consider the strategy that you will take if one of these things comes to pass.
This, of course, will minimise your anxiety in any of these circumstances as you will have a planned approach and have considered the impact financially of these circumstances. Having said all that, you don’t want to be that neurotic and obsessive about potential risks that you never move ahead with anything.
Your personality plays a factor, too, you may be more conservative or more of a risk-taker.
Your attitude to money also affects your risk profile. Do you run a tight budget and save money every month generally, or do you live from week to week and see if there’s anything left at the end?
Any investment requires discipline, organisation, focus and, of course, relevant skills to interpret, define and learn from research in order to develop your strategy.
Your investment experience will also affect your attitude risk to risk.
If you had a bad experience with an investment in the past, you may be hesitant to make the most of the best opportunities out there for you right now.
On the other hand, if you have had fortunate and positive investments and successes, or seen it work for others, seemingly easily, you may be blinded by optimism and over-confidence based on a previous market conditions.
Gut feel and instinct cannot be ignored. We do get a “feel” for a place – but we must not ignore the data and make emotional decisions.
So, the key is before you do your first deal, to make sure you spend time getting educated and understanding what you’re comfortable with, what you need to know, the best tools to help you and have a clear view of your strategy and goals.
Over the last 60 years we’ve seen massive gains in the Australian property market – and property is considered a growth asset – but downturns do and will happen, especially with the wrong property purchase. Whether it be the type of property, location, or the wrong economic conditions.
To avoid big potential problems down the track, and to maximise your chances of success, successful property investing is a path that now, more than ever, requires proper care and consideration.
Getting your risk profile right and keeping it up-to-date is perhaps the most important part of this.