Now that you have a clear picture of what your investing-related risks are, the next step is to decide what you are going to do about them, or in other words, how you respond to those risks. For the positive risks, it is fairly straightforward – exploit those opportunities to the extent you can. For the negative risks, there are four ways to deal with those threats:
Avoiding a risk simply means not doing the underlying action that would cause the risk. For example, if you have the chance to buy a condominium unit in Myanmar (the former Burma) and you foresee currency, political, and market risk in that investment, you can avoid those risks by avoiding this investment altogether.
Transferring risk means that somebody else has to bear the impact if the risk occurs. Who might be willing to do that? The answer is simple: Insurance companies. You can, and in some cases even have to, transfer the risk to them against the premium you pay for the policy and therefore this is an important risk-response strategy. For example, you have to get fire insurance for your property in case it catches fire. In the unlikely event that this actually happens, the insurance company is the one to bear the impact.
Probably the most-used risk response strategy is mitigation. This means you proactively manage the risk and reduce either the impact it has in the event it does occur, the likelihood of it happening, or both. For example, you reduce your impact of a tenant not paying the rent by taking a deposit from him and thus reduce the likelihood of that happening by doing due diligence up-front. See now why due diligence is so important?
For risks that might only impact you insignificantly or that you can’t do anything about anyway, you might choose to just accept them and do nothing. For example, you might want to invest in Australia. You are aware there is some political risk, but the risk is small. Furthermore, any changes in government policy are not likely to impact your investment.
Monitoring Risks And Implementing Action Plans
Just knowing about which potential risks you might face is obviously not sufficient. If you don’t take action and do these things that you have decided upon, the whole exercise was pointless. Having forgotten to take out the fire insurance and your house burning down is not what you want to happen. You absolutely must perform those actions as per your plan and continuously re-visit and update your risk register to identify any potential new, or changed risks, on an ongoing basis.
Risk Reducing Recommendations
Before we look at specific risks that property investments can carry, I would like to share some generic recommendations with you on how to keep your risks low. First and foremost and while it might sound obvious, just avoid those risky investments altogether. There are many safe and solid ones out there that can give you good returns. So stay prudent!
I have shared some advice previous posts that contribute to lowering your overall risk as well, and now you might understand the significance of those:
- Don’t lose discipline and stick to your strategy
- Switch off emotions when making decisions
- Build up financial reserves
- Have multiple exit strategies in place
- Know what you are doing
- Perform due diligence
Don’t let risks scare you away from your investment – just manage the risks.