How much risk can you handle? Assessing your risk profile

GUEST OBSERVATION

No matter how many investment properties you have or plan to have, assessing your risk profile before you purchase is vital.

Your attitude towards risk may affect what types of properties would better suit you. Everyone will most likely have a different attitude towards risk based on their own situation and future goals. What may be considered a risky property by one may be considered a safe option by another.

However, if you don’t do your research and you’re not 100% sure what your comfort levels are, you may end up purchasing a property that will end up costing you financially and emotionally.

So how can you calculate how much risk you can handle? Firstly, your personality will play a part in establishing your risk tolerance. For example, if you have a more conservative nature and tend to worry more, your risk tolerance may be lower than someone who is more of a go-getter. Although it is important not to let your emotions affect your investing decisions, you should still know how much risk you can handle so you don’t lose sleep over your decisions.  

Some other factors that may affect your attitude towards risk include:

Personal life: Are you single, married or have kids? Do you have a stable career? These factors could affect how much risk you are willing to take on.

For example, if you have a family to provide for, you may opt to purchase a property in an area with a lower rental yield, but a strong occupancy rate, giving you the stability of constant rental income to help pay off the mortgage.

However, if you are single and are able to cover the repayments without the rental income, you may be more willing to choose an area that has a higher rental yield, but a lower occupancy rate.

Money habits: Whether you are a habitual saver or live from pay to pay, your approach towards money may impact your risk tolerance.

For example, your money habits may influence which strategy you choose to build wealth on your investment property. When purchasing a property, investors need to decide whether to focus on capital growth or the rental income.

Some property investors find rental income less risky as the property pays them more than it costs to own it and comes to you in regular instalments rather than a capital gain which can be unpredictable.

Past experiences: Having past investment experience may affect your attitude towards risk.

If you have had bad experiences or big losses, your tolerance for risk may be lower.

However, if you have managed to successfully get through rough times before; riskier investments may not bother you as much.

Income: If you have a solid, stable career with a regular income, you may be more willing to take on extra risk compared to someone who does not have a regular income stream.

For example, areas such as mining towns may be more appealing if you have a regular income as the rental income will be high, but you can still meet repayments if the property is vacant. 

Although it will be hard to find an investment without risk, there are ways to meet your investing goals with being exposed to too much danger. Some strategies include:

• Choose mainstream property investments: If you are new to the property market, it is best to steer clear of ‘get rich quick’ schemes. It may promise fast returns, but if you don’t know what you are doing, you could get into trouble. Remember, if it sounds too good to be true, it probably is.
• Manage your finances: One of the main risks of property investing is relying on the rental income to repay your home loan. Most rental properties will experience vacant periods, so it is important for investors to ensure they have enough surplus funds to cover these vacant periods.
• Select an investment that suits your needs and goals. Property experts are regularly releasing information on the up and coming investment hotspots and although an industry expert’s opinion may be valuable, this information is generalised and doesn’t take your own personal circumstances into account. Think carefully about what your needs and goals are and then look at properties that match this.

An investment is a serious financial commitment that can be extremely costly if you don’t know what you are doing. Extensive research and speaking with professionals will help you make informed investing decisions and give you a better chance of building a successful portfolio. 

Heidi Armstrong is the CEO for State Custodians Mortgage Company. As an expert in personal finance, securitised lending and the mortgage industry, Heidi is passionate about educating borrowers to help them make smart lending decisions.