Investing in Property and Risk Management

Property is generally considered a 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:

 

Buffers.

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…I also recommend that investor 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, I would recommend at least a $50K “investment” buffer when buying a $400K-$500K property.

 

Insurance.

This is the obvious broad ranging tool that any investor would be crazy to ignore. Insurance covers:

• Building and content insurance that will cover you for fire, water damage, etc….,
• Landlord insurance which will cover issues with tenants,
• Life Insurance covers your family if you die. You owe them financial peace of mind (even if you don’t invest in property)!
• Income protection covers you if you becomedisabled (eg in a car accident). This cover will provide the investor with an income of about 75% of salary until age 65. Beware of policies that are much cheaper and cover you for 2 years only.

This subject can become complicated and using a good insurance broker is paramount.

 

Location

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.

 

Seek Advice

The above are only a few important considerations, but there are many more relating to financing, legal structures etc…In my mind 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…