Expert Advice with Doron Peleg 22/06/2017
Property can be a risky investment – but it doesn’t have to be.
 
In our research assessing the performance of 200 recent property ‘hot spots’, we found an interesting distortion present. Overall, the investments that carried the lowest levels of risk generally delivered the greatest return, and the highest risk investments (such as mining towns) delivered the lowest returns.
 
These results are unique when compared to other asset classes, where higher risks are generally more highly rewarded. In property, poor risk decisions are driven by lack of education and the absence of a clear investment strategy. To ensure you enjoy a more successful outcome, you need to understand and implement the risk-return approach.
 
The risk-return approach
The risk-return approach suggests that for low risk, an investor expects to get a low return, and for high risk, the investor expects a high return.
 
However, as we can see from our research outlined above, that is not always the case. The Australia property market is distorted: one investor can take a huge property risk and be richly rewarded, whilst another investor can take a huge property risk and lose it all.
 
This is why, as an investor, you should learn about both the risk factor and return factor, to make a wise investment decision.
 
The biggest risks in property are equity risk and cash flow risk.
 
Equity risk is the risk that the value of the property will not deliver your minimum level of return (e.g. 3% a year), or worse, decreases.
 
Cash flow risk is the risk that the rental return will be lower than expected and that the investor will be required, on a regular basis, to cover a significant shortfall between the rental income and property ownership costs. 

 
How to apply a risk-based property strategy:
 
Step 1: Know your ‘risk appetite’
Based on your goals, your financial situation and the potential impact a significant loss could have on you, decide upon the risk that you’re willing to take. While any property investment carries a certain degree of risk, the risks associated with different properties in different areas could be varied vastly.
 
 
Step 2: Find cities that suits your risk appetite
If your risk appetite is low, then invest in areas that carry a low level of risk. These are cities that have the required fundamentals to enjoy a strong ongoing demand, enticing more and more people want to live in these areas. For example, in our ‘Best and Worst off-the-plan suburbs in Australia’ report, we identified Melbourne and Brisbane (and its surrounding cities) in addition to Sydney as holding strong long-term appeal.
 
Step 3: Decide where to invest
Your next step: decide which suburb to invest in. Generally, these suburbs are in good proximity to the CBD; an example is inner-west Melbourne, which demonstrates a very similar growth pattern to the inner-west of Sydney in recent years. In our ‘Best and Worst off-the-plan suburbs in Australia’ report, we identified Yarraville and Sunshine as potential Melbourne suburbs to invest.
 
Step 4: Look for the right property
After finding your preferred area to invest, choose a specific property that carries the lowest risk and is projected to deliver a solid return. Generally, houses deliver stronger capital growth, while townhouses, garden apartments and large units (which might suit families) carry a lower level of risk than smaller units.
 
Step 5: Buy and hold
Due to potential short-term market fluctuations and the high transaction costs involved in property, a long-term investment strategy of 10 years or more is ideal. This generally carries a lower level of risk and is projected to deliver a stronger net return.
 
The RiskWise Property Review's Best and Worst Off-The-Plan areas reports are available at: www.otp.riskwiseproperty.com.au

 

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Doron Peleg is the CEO/Founder of RiskWise Property Review, a Co-Founder and Managing Partner of 'PELEG, KESSEL & CO' and a former Executive Manager at Westpac.

Utilizing 20 years of experience in risk management, Doron has Co-developed RiskWise's property risk rating algorithm. This smart algorithm enables potential property investors to better access and mitigate risks for individual propertues in Australia.

Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.