Sam Lee is a marketing manager and property consultant at JML Property. JML was established in 1994 and offers Investment Property & Homes. It specializes in managing properties for owners and investors, and providing attractive and comfortable homes for tenants.
The work ‘risk’ conjures up a different beast in the mind of every investor.
If you are a speculator, you might tremble at the thought of it. If you are an opportunist, you might redefine ‘risk’ as ‘volatility’ and jump straight into it. If you are a veteran, you have probably developed emotional immunity to it over the years.
No matter what your attitude or philosophy is towards risk, as property investors we all recognise that it is an unavoidable part of the game and that it is our job to find creative ways to minimise downside risk and maximise upside potential.
Here are 10 practical ways you can guard your portfolio against various risks:
1. Buying Well
There is a saying in the property investment community that says “You make your money when you buy, not when you sell”. A little foresight will reveal that some of the biggest risks for a property investment include 1. Not being able to rent or sell when you want 2. Not receiving enough rental income to cover financing costs 3. Physical threats to the property such as structural issues, just to name a few. By setting predetermined heuristics and processes for conducting due diligence on your investment and sticking to them no matter what, you have eliminated most of the risk by simply filtering opportunities and not buying overly risky properties.
2. Buying at a Discount
This ties into the concept of “Buying Well”, but it is so important that it deserves a spot of its own. Negotiation is a core skill in any property investor’s toolbox, and one that needs constant practice and sharpening. Good investors know that there are often factors outside of the price such as the speed of the transaction or creative financing terms that can be offered in exchange for a fair discount. By identifying and solving the seller›s problems, the investor secures an “equity cushion” against market fluctuations.
3. Adding Value
By renovating and/or converting the usage of the property and adding value to it in the eyes of the bank or the buyer, the investor reduces risk by increasing the ‘equity cushion’ previously mentioned. Generally speaking, the more equity you have in the property, the less risk you have.
4. Cash Flow
Cash flow is the name of the game for many property investors looking to build personal wealth and financial freedom. By buying well at a discount and adding a lot of value to the property, you can make sure that the rental income you receive from the investment surpasses the total mortgage payments and management expenses, providing you with passive income month after month. If your investment positioned correctly in the rental market and provides you with steady cash flow, you don’t have to be too concerned with the risk of the market fluctuations. You simply hold on to the asset over the long-term and sell when it makes sense to you, if you wish to sell at all.
5. Responsible Leverage
Leverage is the double-edged sword in every investor’s toolbox. Used correctly, it can accelerate your acquisitions, increase your ROI and build wealth. If on the other hand you over-leverage and get caught at the wrong end of the market, it can wipe you out and destroy your credit and confidence. My personal opinion is that the risk of leaving some money on the table in the short-term is preferred over the risk of over-leveraging and potentially permanently cutting your investment career short. To remove excessive credit exposure and de-risk your portfolio, keep your debt-to-equity ratio at manageable levels.
Next week we will look at 5 additional ways investors can remove risk from their portfolios.