How to Avoid Risks in Property Investment
All financial investments come with an element of risk, and as we keep reiterating, property investments are no exception. But, there are ways you can reduce and even avoid risks when investing in property.
Sometimes, the risk is too much for budding property investors; however, more confident and seasoned investors will know that risk can lead to opportunity when handled correctly. If you would like to find out how you can protect your property investments, read this article on our top five property risk management tips.
Property Risk Management Strategies
It is important to note that different property investment strategies come with their unique levels of risk. The first risk management strategy you can consider is whether to invest in hands-on strategies or hands-off, passive investment schemes, such as crowdfunding and loan notes. These investment options allow you to invest in property without having to purchase one yourself. In the instance of a loan note, you effective loan money to a developer who in turn agrees to pay back this money plus a set amount of interest.
Suppose you’re looking for a more hands-on property investment and are happy to accept the risks that are associated with this approach. In that case, there are five areas you can address in order to avoid some common mistakes in property investing.
Paying the Right Price
When it comes to securing your property for your next investment strategy, the first thing you can do to manage your risk is to get the best price possible. Don’t let your heart rule your head her; if you pay too much for the property in the first instance, you’ll be risking your profit margin in the future.
To ensure you’re paying a fair and competitive price, make sure you do your research. Visit and look up comparable properties in the same area and see how much these have sold for and the average rental fees they can achieve. This information is readily available through Property Data, and it is extremely worthwhile for you to take a look.
In addition to the historical figures, you also need to keep an eye on the projected capital growth in the area. By understanding what your property could achieve will help you to determine the maximum price you are able to pay for your particular opportunity. Similarly, it can help you estimate what funds will be necessary if you are looking to develop the property to help it reach its potential.
Another way you can minimise risk is by monitoring rising interest rates. If you are financing your property investment with a mortgage, rising rates could see your repayments causing your financial grief. Despite your budgeting for the situation now, it is sensible to cultivate a small margin between your mortgage repayments and the rent payments.
Due Diligence: Part One
Due diligence is often mentioned in relation to property investments, and aside from monitoring property prices, there are other areas where thorough due diligence can protect your investment. A crucial area you should research is the location of your potential investment.
Protect your investment by exploring the areas demographics, employment levels, any plans for development or expansion. Are there the necessary services to support your target market? Even environmental factors will help rule out any nasty surprises further down the line, such as flood risks and recent events. This research can be carried out online, but one of the best ways to gain valuable insight is to explore the area in person and speak to letting and estate agents, even locals.
But don’t let your findings blind you. Just because your findings look good now doesn’t mean they will stay this way. Make sure you have covered all the options and looked at the possible future of your location. Is it at the end of its lifecycle? It may be better to target up-and-coming areas such as Birmingham, Brighton and Coventry.
Company Due Diligence: Part Two
If you are looking to invest hands-off into a property development company, carrying out due diligence on your prospective property is only half your job. It is just as important as research into the company thoroughly. This is the same for hands-off investments and alternative financings, such as crowdfunding and loan notes too.
An easy way to access all the necessary information is to study their track record on Companies House and analyse their online reviews online. Be cautious; if a company doesn’t have any reviews or seems to be too good to be true, you may need to do some more digging. Other questions you should ask are: have they always paid out? Do they have realistic returns? Have they ever made a loss – and, if so, how did they bounce back?
Managing Your Investment
There are many ways you can reduce the risk of your property investment by ensuring you are on top of your paperwork and your management of your investment. We have listed a number of ways you can significantly reduce your risk simply by being organised.
Rent arrears are a risk to all buy-to-let landlords; however, there is an easy way to reduce this risk. Before your buy-to-let property goes through, make sure the lettings agency or your property manager has completed all the relevant background checks. You can also protect yourself by looking into a rent guarantee scheme or establishing a landlord insurance scheme to cover unpaid rent.
The government has been cracking down on ‘rogue landlords’, so it is more important than ever that you protect yourself from being accused of negligence. By keeping on top of maintenance jobs, your tenants will reward you in return by staying in your property for longer, cutting the costs and hassle of securing new tenants.
If any problems arise in your property, it is now crucial you have a pot of money on the side ready for maintenance issues. Your buy-to-let property is a long-term investment, and, therefore, it should be expected that your budget incorporated this upkeep. If you have done the due diligence of your property correctly, then you can rest easy knowing you have carried out an accurate assessment of your maintenance costs. An excellent way to plan your contingency fund for these maintenance issues is to make sure you carry out a survey report and a home buyer’s report.
Securing insurance is the easiest way to manage your property investment’s risk. In addition to setting up landlord insurance to help protect you when you want to let your property out yourself, it is equally as important to encourage your renters to take out their own insurances schemes too. In the instance that there is a reason to claim, your tenants will more often than not claim on their own policies.
And, don’t forget to take out insurance on the property separately too.
Protecting your Capital
Many investors turn to the property market for a longer-term investment to reduce their chances of losing money. With their money safely tucked away in bricks and mortar, most feel their savings are safe and ready for reinvestment when the time is right. To reduce the risk of losing money further, many look to liquidity and hedging.
Liquidity and Hedging
This strategy involves an investor diversifying their property portfolio in order to spread out their liquidity. By having various buy-to-let, buy-to-sell, build-to-rent and commercial properties, you will end up with a good variety of assets to profit from or sell if needed.
Similarly, another way you can protect your property investment is by hedging. By selling some of your equity or some direct property exposure, reducing your amount of borrowing and focusing on your existing debit or selling assets while there is demand, you will also boost your liquidity.
An alternative method is through property finance options. Property finance comes in many forms, and there are methods out there that enable you to protect your capital or understand your true investment potential without risking everything. It is always worth talking to a master broker to gain expert advice relevant to your financial situation.
Possibly the simplest way to manage your property investment’s risk is to keep on learning about investing in property and about the property market as a whole. By reading and listening to first-hand accounts from other successful investors, you can gain real examples of how certain situations were avoided or managed, allowing you to make a contingency.
With Property Summits, you can stay up-to-date with all the updates relating to the property market whilst benefiting from the insight of five successful property developers, investors, landlords and commentators. Whilst they might not always agree, their friendly debate provides an honest and well-rounded view of what is new and relevant to the property market. And, you can gain guidance from their own anecdote and experiences as they share with you strategies and stories from their current property portfolios. Make sure you’ve registered with us so as not to miss out on their upcoming events.
We recommend seeking independent financial advice and carrying out your own thorough due diligence to your unique situation before going ahead with any investment option you may be considering.