First, to be clear, there is always some risk when investing in property. You can do a lot to mitigate it, but there is still some risk.
How far are you willing to push for the rewards and returns you want on your investment, what are you willing to risk to get what you want.
Are you willing to risk everything to get everything, or take the safer road and have less chance of losing money on your investments?
Let's look at some factors that impact the risk of an investment.
1. The level of work required for a project.
The more work there is at the outset of a project, the higher your potential risk factor is. An example of this would be a project where you expect to do a basement conversion to later find substantial water issues just under the floors while digging out for the works to take place. Comparatively buying a new build property with everything done lessens such potential risk, and you are likely to have some form of insurance against any significant issues. (note that it is common to pay a premium for this reduction in risk)
2. A changing neighbourhood.
Seeing a neighbourhood starting to change, could be a great time to invest, values could increase while the quality of housing stock and services in an area improve. However, some areas can turn for the worse, mainly if it is a fringe area that's not particularly good or bad at the moment. Examples of this are areas where major infrastructure have passed it by or regions see a substantial increase in crime and anti-social behaviour.
It is often beneficial to buy in areas that are seeing a lot of new projects and buildings being built and sold. The caveat with this is to keep in mind that the area could suddenly see a flood of competing properties. Moreover, where there is much competition for limited buyers, prices are likely to see downward pressure.
4. Small potential markets - Unique properties.
Over the years I have seen some unique properties do incredibly well, but I have seen much more do very poorly. Taking on a project that offers something that is very different from the norm could open up a new segment of the market or fill an underserved need. However often is the case these types of properties perform very poorly and leave the buyers or investors with a project that needs to be redone or sold for pennies on the pound.
5. Future planning.
When purchasing a project with the potential to redevelop and gain significant uplift due to change of use or increase in size and so forth, you have massive upside potential, but also run the risk of the planning being turned down and be left not able to do the proposed and planned works.
6. Future projects.
We have all seen the incredible performance of prices around Crossrail stations and other more substantial projects. Buying with the expectation that these projects will have a positive impact on prices is a common form of investment strategy, the one thing to keep in mind is that these projects could be cancelled or severely delayed which could very much impact your exit strategy.
These last two options, 5 & 6, are excellent examples of where a project must work in its current form or position, buy these types of projects where they could still be made profitable or have very minimal losses when you start out.
You have to decide what level of risk you are willing to take on, with what level of risk are you comfortable?
I find it easier to explain it with the example of investing in government-backed bonds to FTSE 100 company to a mid-cap company down to penny stocks on an overseas stock exchange; you can determine what risks you want.
If things went wrong and you lost 50% would that mean financial ruin, or is it worth the potential upside of doubling your money? Take advice, get the information you need, and then you decide for yourself.
“Trust your own instinct. Your mistakes might as well be your own, instead of someone else’s.” — Billy Wilder
Do you want to know more about how you could potentially minimise risks on your property investments, then please comment below or contact me directly.
In the next part of this series, we will discuss how you choose between investment type or investment location.