Let’s discuss the specific risks you might be potentially exposed to as a property investor.
Market And Price Risks
One of the first things that often come to the minds of people who think about investing into property is that the price of their property might drop and hence generate the misconception that such investments are risky.
Remember when we make money? When we buy? If for example you bought a property 20% below market value, it means that you are already protected against a price drop in the market up to that percentage. You have learned about the market cycle, area selection, and multiple exit strategies, which further reduce your risk of the price of your property dropping.
Furthermore, in order to increase the value of the property you can add value to it. And lastly, if you have chosen any of the strategies that give you a good passive income, does the current market value of your property really matter that much? Even if it has dropped a bit temporarily, you are still in good shape as long as the income keeps coming. As long as you do not have to sell that property, you just wait until the price recovers.
Do not underestimate the financial risks that naturally come with any investment. If you have bought your property for cash and have plenty of reserves, those risks are rather small. However, the higher you are leveraged, the more attention you need to pay to potential financial risks.
First there is the liquidity risk, which can arise from either large unexpected costs suddenly hitting you, or the expected cash flow not coming in. To always stay in a liquid position is one of the highest principles of Finance. To minimize the liquidity risk, you need to keep sufficient reserves and continuously monitor your cash flow. To keep your cash flow coming, you need to ensure the rentability of your property before you buy it and select the right tenants, but all that is not news to you.
Financial risks also pertain to the capital that you have borrowed and leveraged on other people’s money. To guard yourself against rising interest rates, you should have a portion of your portfolio on fixed interest rates and monitor the markets to check which direction interest rates in your chosen currency are heading.
In order to mitigate your risks that pertain to the capital that you have leveraged upon, you ought to ensure you have a clearly defined process in place in your contract with your investors, how, and when they can get their money back. For the capital that comes from the banks in the form of mortgages, you should ensure that you always pay your instalments on time and maintain your creditworthiness and to keep good relationships with multiple banks so that you have more choices when the time to re-finance your mortgage has come.
Country And Currency Risks
Investing into a country also means investing into its currency. What are the risks arising from that?
I would not recommend buying properties in countries that are either politically unstable, have frequent unrests, or do not have a proper legal system to protect your interests. Political instability or even unrest is nothing that you can possibly manage yourself. In countries with high corruption rates and no mature legal system, your property suddenly might not belong to you anymore!
Even in mature markets with established democracies and proper legal systems, there are still elements of risk and those are the risks of change. The applicable property laws or tax laws might change over time. In such countries, those changes are transparent and openly discussed in parliament, so keep yourself abreast of the relevant news.
Investing in countries that use a currency other than your home currency brings about currency risk, which is twofold: First, the moving of exchange rates will positively or negatively affect the value (and hence profit or loss) of your investment. Second, if you finance your property in a currency that is different from the currency of the country that it is located in, you could have additional profits or losses arising from that.
As the header suggests, those are risks that pertain to the safety of your property as well as your tenant. As a landlord, you are obliged to ensure that your property adheres to, or exceeds, the relevant local safety regulations, which might include electrical wiring and sockets, not having sharp exposed edges or leaking water pipes.
The risk response strategy for the safety of your property is clearly taking out appropriate insurance cover. What is required in most countries by law, as well your lender anyway, is that you must have a fire insurance policy. You might want to consider a home insurance for the contents as well as a landlord insurance in order to protect yourself against your furniture and fittings (if you are renting partially or fully furnished) getting damaged as well as against potentially high legal costs in case of any unavoidable lawsuits relating to your property.
Dealing with people naturally always involves an element of risk. But that doesn’t mean that we don’t do it, right? As Mark Zuckerberg said, “The biggest risk is not taking any risk.” Some of the people-related risks might be, for example, that the estate agent or letting agent might not tell you the entire truth – hence, the importance of due diligence. Any potential damages by your tenant to your property or its contents should be insured. Maybe your staff or partners might try to get the better of you – so put the appropriate controls in place. Don’t give full access to your bank account to your newly-hired staff. You might need to authorize or approve outgoing payments before they get released.
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