Every property investor is different, and it’s important to recognise that there is no single property investment strategy or investment type suited to everyone.
When building and expanding your property portfolio, you need to establish what it is you are aiming to achieve, and what it is you can feasibly achieve, to understand the right strategy and investment types to support this. Knowing your risk profile and understanding the limitations that accompany this is crucial to determining what type of investment suits you, as well as the results you can expect from your investment strategy. Here are a few essential points to consider when determining the right type of investment for you.
Defining your risk profile
What are your property investment goals?
Before choosing the right type of investment for you, you first need to consider what it is you want to achieve from investing in property. In other words, what are you short and long-term goals? Are you hoping to get a steady income stream from your portfolio, or are you looking to achieve long-term growth? Outlining your objectives will help you build a clearer picture of the long-term plan you need to achieve your goals, helping to inform your investment decisions along the way.
Bear in mind that your property investment goals, and implicitly your risk profile, will likely depend on your financial situation and where you are in your investment journey. For instance, an investor who is at the beginning or peak of their investment journey is likely to have different goals than someone who is nearing retirement and perhaps seeking a steadier source of income to align with their cash flow needs.
How secure is your financial situation?
Your tolerance for risk and your ability to handle fluctuations in market conditions will depend heavily on your cash flow security and your financial situation. For example, an investor with a strong and stable source of income may be able to tolerate more risk and short-term losses than someone who has a more volatile source of income with low security. Similarly, an investor with low levels of debt and fewer obligations is likely to be able to cope with more risk (and have more borrowing power) than an investor with high levels of debt and multiple dependants.
How do you handle risk?
As well as outlining your investment goals, it’s also important to consider your tolerance for risk when determining the type of properties you’re suited to as an investor. Whilst high returns might be your ideal goal, you also need to consider whether you are willing to take on the risks that might accompany this investment strategy.
For instance, how would you react if your investments dropped in value? Are you willing to incur (and can you afford to take on) short-term losses for the prospect of high long-term returns? Or are you looking for reliable income, but willing to accept lower growth over time? By understanding your view on the relationship between risk and return, you can start to form a strategy that balances both your objectives and your needs as an investor.
Understanding your risk profile
- Conservative – Investors with a lower risk tolerance are more likely to take a conservative approach and invest in assets with lower volatility. These assets are more likely to maintain a steady value, but may not offer the same long-term prospects as higher growth options such as value add strategies.
- Balanced – Investors with a more moderate tolerance for risk are likely to invest in more growth options with moderate income potential. Investors adopting this strategy might take a more balanced approach to investment, offsetting the risk of high growth properties by maintaining some funds in income-producing assets.
- Aggressive – Those with a higher risk tolerance will generally take a more aggressive approach to property investment, focusing on high growth and value add strategies. This may include strategies such as property development and renovations, which focus on building equity and improving yields to allow for further investment. These strategies may present greater risk, but often with the potential for higher returns.
Getting professional advice
There are many different factors to take into consideration when developing an investment strategy, and whilst the above may give you an idea as to the strategy that might suit you, it’s important to seek professional advice when determining the right type of investment to fit your unique situation and goals. A professional buyer’s agent will be able to assess your personal circumstances, financial situation and long-term goals to help you identify a property investment strategy that supports your property objectives, whilst also aligning with your financial needs and tolerance for risk.
There is no doubt that you need a solid team of professionals supporting you in your investment journey. From financial planners and mortgage brokers to buyers agents and property managers. Every one of these people need to be experts at what they do and be able to guide you in the right direction once they understand your risk profile and goals.
Thank you to Momentum Wealth for their content contribution.
