Risk Mitigation

It pays to be careful.

Profit is the return to risk. No investment is 100% fail-proof. The investor needs to be aware of the risks and the contributing factors and how to mitigate those risks.

 

The ACQUISITIONS RISK refers to the risk of buying the ‘right property’. The factors to include are the health of the economy generally and the phase of the property cycle for a particular area.

Demographics – include baseline population figures and forecast growth, typical family compositions. Identifying matching property types and above-average household incomes and employment rates all contribute positively to the balance of evidence to support a choice.

Vacancy rates and the demand for accommodation, the supply of property now and planned as well as local infrastructure, should also be examined.

Due diligence, with the assistance of expert advice, makes it more likely to hone in on ‘above average opportunities’ in the market.

2. FINANCIAL RISK is contingent on your ability to sustain the investment for the long term. Remember that property is nor a ‘get rich quick scheme’, time is more important than split-second timing!

Any decision you make must be sustainable for the long term, and so the bottom line out of pocket costs should be kept within a range that doesn’t become a stressful or unmanageable burden. It’s important not to ‘bite off more than you can chew’!

We have talked before about having a team of experts and qualified, professional tax advice is essential. Tax should not and can not legally be avoided in Australia, but it can be minimised! Having sound advice about ownership splits and structures will allow you to reduce your tax burden and maximise your rebates, both contributing to sustainability.

The availability of credit will also vary from time to time depending on prudential regulation, monetary policy, national savings levels, consumer’s propensity to consume and more.

Particularly when purchasing a property off-plan, with a delay between commitment and settlement, lending criteria can change. Again this reinforces the advice that building in a contingency for the unforeseen is wise and not committing right to the limit of your borrowing capacity.

Ensuring the property against damage or loss of rent is crucial and is an allowable, deductible cost of ownership.

3. MANAGEMENT RISK is concerned with will my asset be looked after?  Australia is a vast country, and as we have also seen, there is no one property market. There are opportunities across this big country, far and wide.

The correct investor mindset makes the decision based on the balance of evidence, and therefore, the target area may be outside your immediate reach. As an investor, as your portfolio grows, you can’t be ‘looking over the back fence’. Most of us are too time-poor, specialising in our own jobs and areas of expertise to be self-managing a property portfolio. Sourcing, vetting and managing the tenant is a specialist Property Manager’s role.

Finding a tried and proven Property Manager, based on recommendation and experience is a priority. Keeping tenants and minimising turnover and having them care for your property is also encouraged by being a fair and responsive landlord. Tenants have a right to expect that the property they are paying for is in good order, and everything is working as it should. Prompt attention to any repairs/ requests usually pays dividends in terms of keeping quality tenants.

Of course, it’s not unheard of to suffer damage or rent arrears or default, and so Landlord Protection, building and contents insurance are strongly advised.

4. Exit Risk can be mitigated through expert advice about timing and carefully researched, property selection from the start. Some investors have no intention of cashing in their investments and instead choose to live off the proceeds rather than the capital itself. This may be the case if they have built up a sufficiently large portfolio to support themselves and may wish to bequeath their assets to their children or others.

If the intention and decision to exit is made, it may be a partial divestment (one property at a time, or a portion of their assets) or it may be all at once. As there is no one property market, some in growth phases and others not, it is more likely and sensible that a diversified portfolio is sold off at the right point in the property cycle for each property. If proper due diligence has been conducted initially, appropriate properties that maximise market share will have been chosen, and so the market on the resale is also optimised.

When it comes to Capital Gains Tax payable, a qualified and experienced accountant can advise you how to reduce your obligation. CGT is charged at your top marginal rate and so timing the sale of property in a financial year in which your earnings are lower may be advisable.

Some risks are identifiable and readily accounted for and insured: Others are less predictable, such as exogenous shocks that impact the economy, like COVID-19 or strained diplomatic relations with a major trading partner impacting our GDP through fewer export sales. Legislative changes to government policy can limit the incentives and support available to property investors. While the apparent can and should be identified and the investor should adequately protect themselves, the importance of good education cannot be understated as a means of preparing for and understanding the consequences of  ‘black swan’ events such as the pandemic we are currently finding our way through.

Clearly understanding the critical role of housing investment in the economy via the multiplier effect on jobs and production and ultimately welfare, should provide confidence that macroeconomic management (as well as micro or structural changes) is the constant concern and responsibility of government and that a ‘floor’ under housing prices is as important to Australia as it is to individual investors. Having an informed and calm assured investor mindset and approach to both the business and the property cycles and their trend line allows the investor to survive the troughs and be poised to enjoy the inevitable peaks.

The provision of expert advice and assistance in the process makes it far more likely that the property(s) will be chosen to help minimise risk – those with a predominance of recession-proof employment options, strong yields for sustainability, tight vacancy rates in diverse economies, priced well within the investors comfort range and ongoing cash flow capacity, and appropriate property configurations and styles to align with current and future demographic trends and appeal on exit.