Have you done risk management before? Whenever I ask this question during my events or classes, only very few people raise their hands. As a matter of fact though everybody is doing risk management on a daily basis, including you. We might not have thought of our actions in those terms.
Do you look left and right before crossing a road? Have you ever gone to the airport a little bit earlier than absolutely necessary? Have you told your kids not to play with fire? All those are examples of risk management. The risk is getting run over by a car, missing your flight, or your house burning down and you are taking actions in order to prevent those risks from materializing. That precisely is what we call risk management!
Many people think of risk only in negative terms. Per definition, a risk is an uncertain event or condition that, if it occurs, has a positive or negative effect. So risks can also be positive! We call negative risks threats and positive risks opportunities. Noteworthy is that they are both uncertain, so we do not know whether they will in fact occur or not, but if they do happen they will have an effect, which is the very reason for doing risk management.
The next question you might have is how to identify and manage risks in property investing? The process of risk management involves planning, risk identification, and analysis, defining risk responses, risk monitoring, and implementing action plans. Sounds complicated? Not so – it is actually quite straightforward if you break it down into small, manageable steps, which I will be helping you with.
Risk Planning, Identification, And Analysis
The first step is to plan how you will perform your risk management. Think about how you will identify the specific risks pertaining to your investments, how you track and monitor them and how often you plan to do this process, which depends on the size of your portfolio. For a larger portfolio, you will need to put in more effort than for a smaller one. However, there are also synergies such as currency risk, which can be managed at one go, for one currency, whether you have one to multiple properties in that country.
Once you have identified applicable risks (remember, both negative and positive ones) you need to analyze them. This means you have to evaluate the potential impact that a particular risk has, in case it materializes and becomes an issue, as well as the probability or likelihood of the risk actually happening. For example, if you are not based in the UK, but have invested GBP 100,000 there, you have a currency risk for that amount. If the British pound drops by 10% against your home currency, you could potentially lose the equivalent of GBP 10,000 (threat), but you see the probability of that actually occurring as quite low. Of course if it goes the other way, you could also gain the equivalent of GBP 10,000 if the currency moves up (opportunity).
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