Risk Mitigation

It pays to be careful.


1.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 not 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 on 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.






Buyer Beware

There are no tricks to property investment!


Beware of those who make sweeping statements, offer guarantees, use pressure tactics, don’t acknowledge the risk, and avoid questions or concerns.

There are no rabbits to be pulled out of hats!

But it’s not rocket science either!

As with any purchase, the onus is on the buyer to be aware.

The best way to be aware is to be educated and know the right questions to ask.

Understand that there are no guarantees. A qualified, honest property professional will make evidence-based recommendations that meet your needs (not theirs)

Understand that ‘life is what happens while making other plans’ and so your circumstances may change over time.

It is therefore important not to over-commit and to invest sustainably for the long term and to ‘stress test’ your cash flow figures.


Go into it with your eyes open:


Resilience planning for economic downturns

If this past month has taught us anything, it’s that good times can turn bad quickly.


In December almost every property commentator was salivating at the thought of markets on the rise. After price retractions in Sydney and Melbourne, the turnaround was beginning to gain momentum. Markets such as Brisbane were seeing long years of dormant performance coming to an end with early February 2020 indicating a bumper year was in store for the Sunshine State’s capital.

Cue forward four weeks and who could have imagined the picture before us with the COVID-19 pandemic. Millions unemployed, tenants provided a moratorium on evictions and banks offering a freeze on repayments.

Of course, the full force of the economic tsunami is yet to be seen, because the property market’s strength is directly linked to confidence. If convincing solutions to the crisis can be found quickly, then the market will return in force. Prolong the pain and the recovery will likewise be extended.

But of course, the big lesson for everyone from political leaders to entry-level workers is simple – planning pays. Here what we can all learn as property investors from the Coronavirus (COVID-19) crisis about surviving the ups and downs.

Know your path

Advisors in our network follow a 14-step process to help clients build a portfolio… and the first eleven of those step having nothing to do with property selection. So when it comes to beginning an investment journey, don’t get caught up in researching real estate straight off the bat. Instead, carefully plan your path.

Recognise your starting point and defining your goals.

Write down your current asset base and income and work out what you want them to look like eventually. Think about how long you want to take to get there and layout your prospects for future income growth. Also, consider what life events may be before you. Are there kids in your future? Is a move interstate or overseas for professional advancement likely? You won’t know all the answers with 100 per cent certainty, but most people can sketch out a reasonable idea of how they’ll get from beginning to retirement and the types of considerations that need to be added to the mix. By setting out your path, you have a reasonable plan to follow to reach your endpoint.

Assess your risk tolerance (Stress Test)

This is important because long-term investors must be able to deal with market ups and downs. It’s essential to understand how you relate to risk so you can select the right composition of property types for your portfolio. For example, you may be an average wage earner with a family that needs the surety of shelter, education and other essentials. As such, you might seek assets that compromise a little on value growth potential but provide a stronger cash flow position. Conversely, you might be a young professional on good income who can invest a bit more and bear the cost of having to tip in a little extra each month to support your investment, knowing that it has great potential for value growth. Understanding your risk tolerance means you can travel with confidence and avoid panic if the market takes a hit.

Understand your finances

It is essential to have a handle on your finances. This includes home budgets, asset balance sheets and your borrowing and loan servicing capacities. This is where an experienced mortgage broker and property investment advisor are essential. Your investment advisor can help guide you through the key numbers to make sure everything is up to date. Great advisors also implement a regular audit of your figures to ensure they’re always current. Mortgage brokers will help you seek the best loan terms and give plenty of advice on what to do to improve your chances of gaining approval. This could be for a new purchase, or when refinancing under changed circumstances.

Buffers are essential

Perhaps more than anything else, those who are most successful at riding out the market rollercoaster are investors who have buffers in place. Make sure you are not overextended continuously in your loan capacity. Similarly, ensure you can comfortably meet loan repayments and other portfolio operating costs. Finally, work toward having a pool of available cash you can draw on in emergencies. This usually is best kept in an offset account to help reduce your interest bill as much as possible. This buffer – which should cover at least three months’ worth of outgoings – means you can hunker down and ride out most unexpected hits. This buys you the one thing that we all need in a crisis – time. The buffer lets you make plans without fear and can help deliver you to another side, a downturn intact.

While maintaining personal and physical safety during these events is your primary goal, the importance of planning for financial hits can’t be ignored.

Applying the principals outlined above will help you ride out the storm.

Author: Richard Crabb | MD ASPIRE Network | PIPA Board Member