Does RISK drive you up the wall? 6 Ways to Mitigate Risk

Discussion in 'Investor Psychology & Mindset' started by Property Twins, 25th Jun, 2017.

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  1. Property Twins

    Property Twins Mortgage Brokers & Buyers Agents Business Member

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    It's easy to come up with excuses to not take action than to work past the barriers of analysis paralysis, fear and non direction. Most people plan their holidays better than their financial future. Property investing is risky. However so is getting out of bed in the morning. The biggest risk is taking no action for a better financial future.

    Reviewing and mitigating risks is an important part of building your portfolio. How do you mitigate your risk?

    SELF EDUCATION
    • Educate yourself through reading books - property investment and personal development go hand in hand
    • Review resources such as realestate.com.au / domain.com.au, onthehouse, Price Finder / RP Data / SQM Research (Vacancy Rates)
    • Talk to real estate agents and network with those who are where you would like to be. We are an average of the 5 people we spend the most time with, so surround yourself with people who are where you want to be
    DO YOUR NUMBERS
    • Aim to buy a cash flow neutral / positive property so your lifestyle is not impacted AND so you can keep your doors open to build as big a portfolio depending on your goals, depending on your resources
    • Build and maintain 3 to 6 months’ cash or equity buffers for all your properties to ensure you are covered in an event of vacancy or unforeseen maintenance issues or change in circumstances
    • Look at comparable sales, rental returns and vacancy rates in the area you are looking to buy to make sure you are not overpaying and will have a reasonable cash flow position
    • Buy established where you see there is a huge price gap between the brand new and the established property and the rental returns not much different or better
    • Buy brand new –only when nobody wants to buy them and you can actually get a deal at “market value”, when it’s cash flow neutral (or does not cost a lot to hold), poised for capital growth
    • Consider Interest Only vs. Princial and Interest; Fixed rates versus Variable rates - how does the approach impact you moving forward?
    • Think forward - not just about your current purchase but about the one after that and the one after that
    FUNDAMENTALS
    • Buy in regions with multiple industries and not one industry towns such as the high-risk mining towns
    • Consider historical growth. If a market has been booming for a number of years, what is the likelihood of it continuing to grow? Are there better opportunities in other markets, with better rental returns? As values increase, rental returns decrease, which leads to decreasing interest in a particular market / location, with investors moving on to areas which offer better rental returns, and therefore lower holding costs
    • Australia has multiple real estate markets, which are at different stages in the property cycle, offering varying rental returns and fundamentals. You do not necessarily need to buy in the city where you live. You can leverage of other experienced investors’ knowledge, and engage professionals who specialise in other cities to help you with your purchase(s)
    • Consider where you can afford a better quality property (e.g. a house with land component). Land appreciates in value, whereas buildings depreciate
    BUILD A TEAM
    • Ensure you have a quality team around you - consider: buyers agent, mortgage broker, solicitor, building and pest inspector, strata search company and property manager
    INSURANCES
    • Ensure you have adequate building and landlord insurances in place
    • Ensure you have adequate Trauma, Death and Total Permanent Disability (TPD) insurances in place, in line with your assets and liabilities
    TAKE OWNERSHIP & ACTION
    • Write down a strategy that works for YOU. What are your negotiables? What are your non-negotiables? What really ticks your boxes?
    • Take charge of your financial future, rather than relying on external factors such as tax rules
    • Last but not the least, TAKE ACTION. ACTION cures FEAR
    What's your take? How else do you mitigate your risks?
     
    3rd Drop, paulF, Sackie and 4 others like this.
  2. Xenia

    Xenia Well-Known Member

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    Risk is just another word for opportunity.

    I don't do numbers and due diligence, I know what I can absorb losses on and still be ok.
     
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  3. kierank

    kierank Well-Known Member

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    I agree with everything you wrote in your OP except the above.

    For me, Higher Yield/cashflow positive type properties are a bigger risk to one's financial future/independence than Higher Growth properties.

    With Higher Yield properties, one runs the risk of not creating sufficient Net Worth to obtain the financial future one is expecting/seeking.

    That is my take.
     
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  4. Property Twins

    Property Twins Mortgage Brokers & Buyers Agents Business Member

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    Agreed @kierank. However do think it will come down to one's resources. When starting young people don't always have the cash flow to sustain CG properties.

    Ironically though, Western Sydney properties that were positive cash flow - purchased over the last 4 to 7 years have close to doubled in value :) in most cases 70% to 90% CG.
     
  5. kierank

    kierank Well-Known Member

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    IMHO, what happened in Sydney the last few years is NOT normal, is NOT sustainable and is NOT repeatable any time soon (in Sydney or anywhere else in Australia).

    The people I know and respect with property in Sydney has either already sold or are in the process of selling. They believe the market has peaked or is close to it.

    Time will tell if they got it right or not. Obviously, they see the risk of that market going down.

    My view is as follows. It takes years (maybe decades) for growth to end up as cash in my bank account.

    Whereas, I can increase my income/cashflow today and have the cash in my bank account tomorrow (next week at the latest).

    There are many ways I can increase my income/cashflow today (beside rental yield) including:
    • Work more hours in current job
    • Work overtime in current job
    • Get a second job
    • Get a better/higher paid job
    • Get partner to do one/all of the above
    • Start an after-hours business
    • Start a full-time business
    • ...
    Growth is compounding and, like all things that compound, it takes time for growth to work its magic. And the more growth the better.

    Young people have time on their side. I think it is criminal if they waste this time seeking higher rental yield and sacrifice growth.

    As I stated, there are many other ways to increase income/cashflow. There aren't too many ways of achieving growth and they all typically take time.

    I don't understand why anyone would put growth on hold or minimise it. They should go for maximum growth that they can afford and as early as possible to allow growth time to work its magic. Young people especially.

    That is what I told my kids.

    That is my take.
     
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  6. Sackie

    Sackie Well-Known Member

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    Nice summary of OP.

    I do agree with @kierank on the CG side of things, though ultimately it will depend greatly on individual circumstances.
     
    kierank likes this.