Risks are part and parcel of any business venture or investment.
There is the possibility that an investment’s actual returns might be different from what is expected. This is usually expressed in terms of volatility of return. Generally, the greater the risks, the greater the rate of returns an investor will expect.
Sometimes those risks are minimal, as is the case with treasury bonds, but other times, such as with stocks, options and commodities, the risk can be substantial. The more risk the investor is willing to take, the more potential for high returns. But great investors know that managing risk is more important than making a profit, and proper risk management is what leads to profitable investing.
So here are the five “L”s of property investment risks
- Unpredictable changes will happen as time passes by
- Always wise to diversify your options
- A discerning investor has to understand their risk profile
Property disposal will take time. For example, if you have an emergency, it would be difficult to obtain the money quickly
- Larger investment = Larger return = Larger risk
- Large investments will require higher attention by investors due to high stakes
- Can come from both sides – bank and borrower
- Loan call-back as a result of the borrower’s default
- Monies from foreclosure proceedings might be insufficient due to market conditions
- Genuinity of title deed
- Potential of rezoning as time passes by
- Status of Entities; Business owner enterprise
- Occupant of the property
Here are some measures for you to take note on:
1. Have a cash buffer.
Property investment is a cash-intensive game. You should have at least 6 months to 1 year of monthly instalments worth of savings.
2. Know your legal process.
You should know what you are signing. Know the reason why the documents and agreements are there. Seek legal advice if you are unclear.
3. Expand your network.
You should get to know the other players in this industry: the valuers, real estate agents, conveyancing lawyer, mortgage brokers etc. All these people can give you insights and tips on how to mitigate a specific risk. So, be friendly. Get in touch with them. Keep them in your close circle.
The bottom line is, every investment strategy will have risks and managing those risks is how to gain the best performance from your money. Don’t reach for higher rewards without first evaluating the risks involved. Seasoned investors know that it’s a lot easier to lose money than it is to gain it.
All the best in your property investment journey!
This article was first published for Property Hunter Magazine, Issue 94.