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Falling In love with Bricks & Mortar Investment? What’s Your Appetite for Property Risk?
Property Investment and Your Risk Appetite!
We’ve all witnessed the heady heights of property prices in Australia over the past few years, along with the substantial increase in local and overseas property investors giving them a nudge. When you take a look at these lofty rises in median house prices, it’s easy to see why people have fallen back in love with bricks and mortar investing, to help plump up their investment portfolios.
There’s no doubt property can be a great investment opportunity for seasoned investors and newcomers alike. Generally speaking, unlike shares, futures and currency markets — property isn’t as volatile, and it’s a whole lot more tangible. When you buy a property, it’s there for you to see. You can either live in it, renovate it to add value, lease it for a steady return, or help pay off the mortgage.
If you’re a first-time investor — thinking of becoming one, or have had some previous experience, it’s always important to remember that any investment carries risk. Unfortunately, many people enter the market believing they are on a sure thing — and there’s no such thing as a sure thing! What goes up inevitably comes down, or stays where it is for some time, so it’s extremely important to find an entry point with the least risk.
Many property investors are also buoyed by the belief that property prices always rise, making it as close to sure things as you can get in the investment world. In many respects, this may be true but it’s also relative and depends on complex factors.
We hope we never have to face a property disaster such as in Detroit, Michigan, where the entire city declared bankruptcy and property prices plunged. It’s hard to imagine this happening in Sydney or Melbourne, for some factors, but the recent decline in the mining sector could be a reason to play it cautiously.
Some towns and cities in Australia have already seen property prices plummet due to direct reliance on mining and its decline in those particular areas. If nothing else, this gives an indication of possible risks.
The RBA has reluctantly lowered interest rates to help bring down the Australian dollar (AUD), making it more attractive to foreign investment, exports and local innovation to pick up where the mining sector has left off. The term reluctant can be used here due to the concern that lower interest rates could add to an already overheated property market.
Most investors prefer to think of what will happen when prices go up and how that will enhance their portfolio. If you’re in the ideal position of being able to invest without a mortgage, your risk will be considerably less and potential profits more.
If on the other hand you borrow at unprecedented low-interest rates, enter the market on a high and pay unusually inflated prices, your risk will be greater — especially once interest rates begin to rise, which they inevitably will.
Appetite for Risk
Before investing, it’s important to know your risk profile. You need to know how much risk your portfolio can handle and more importantly how much risk you can handle in your life. Taking on too much risk can negatively affect you emotionally as well as financially, so the key is research and analysis of the market, as well as your appetite for risk and financial position.
Depending on your age, you should have a pretty good idea of your financial situation and your appetite for risk, or lack of it. ‘Know thyself’ is great advice before you take anything on.
If you don’t, you may find yourself in uncharted waters. The last thing you need is to be in over your head, as this can easily taint your enthusiasm for property investment in the long run.
Reduce Your Exposure to Risk
There are ways of reducing your exposure to risk in the property investment market. If you have some experience in this area, keeping your portfolio as diverse as you can, along with continued education on the state of the property market is a sound idea.
If you’re a first-time buyer or have a low appetite for risk, steer clear of high-risk investments that promise big rewards, fast – they rarely deliver. It’s not a bad idea to stick to safer low-risk localities and asset types.
Make sure you have a good cash buffer to protect you from any unforeseen costs that might arise. These can include repairs, maintenance, and lack of rental income, or — if you have a mortgage — interest rate hikes.
You need to be able to sail through the good and the bad times in order realise the fruits of your investment labour.
The lure of historically low-interest rates can be a great incentive to invest, but they won’t stay low forever, so you need to be able to cope with a rise. Higher interest rates can be a good thing or a bad thing, depending on where you stand.
Investing in property can get you great returns, so it’s worth putting in the time to learn more about it and yourself.
The more you learn about property investment and how to best diversify to suit you risk appetite, the better your chances of risk reduction will be.
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