Knowing how to reduce risks when investing in property is vital if you want to ensure you get the best possible returns on investment.
That’s because the more risks you take, the more chance that at some point you’ll get things spectacularly wrong.
While it may be true that an element of risk-taking in property investment can help you make more money more quickly, that doesn’t mean you shouldn’t actively look to reduce those risks when you can.
With that in mind, here are our tips to help you reduce risk when investing in property and boost your chances of a profitable investment.
What Are The Risks Of Property Investment?
Before we move on to how to reduce the risks of property investment we should first look at what the risks actually are.
We actually covered this in detail in our previous article titled Risks of Buying An Investment Property. However, for now, we’ll assume you haven’t yet read that article.
So, in short, here’s what we highlighted as the key risks to be aware of:
- Bad location
- Condition of the property
- Market conditions
- Choosing the wrong property
- Business closures (commercial)
This is by no means an exhaustive list. However, it does highlight some of the key risks to be aware of.
Now, let’s look at how you can reduce this risks and other key risks that may affect you.
How To Reduce Risks In Property Investment
Some risks are worth taking, some are not. It’s all about calculating the risk/reward ratio and then going for the risks that make the most sense.
Even then, if you can reduce the risk without affecting the rewards too much, it’s worth doing.
Here are 11 methods you can use to reduce the risk of any property investment you make.
1) Do Your Research
Too many people rush into buying an investment property without properly considering their purchase.
It’s understandable. The excitement of buying properties to rent out or sell on can grip even the most level-headed buyers.
However, it’s important you keep your feet on the ground and look all the opportunities and risks a property offers.
If you plan on renting it out, make sure you calculate your yield potential. Make sure you understand the nuances of that particular property and the area it’s in. Check there is a demand for that type of property in that area.
The better you do your research, the less likely you are to make an expensive mistake.
2) View The Property
This is important at any time but particularly relevant when buying properties at auction.
It can be tempted to rush into buying a property without first having at least one viewing. This is asking for a disaster.
Many a property investor has been broken by not viewing a property and then later finding out there’s a major defect.
But it’s not just that. Unless you’ve viewed a property, how do you know what work needs doing and how much it’s likely to cost?
It’s almost impossible to come up with a budget if you don’t view the property in person and inspect the condition of it very carefully.
3) Read The Legal Pack
This is another auction one. Before making any bids on a property, be sure to read the legal pack.
This will give you the lowdown on what you need to know about it before you commit to parting with your hard-earned cash.
In fact, reading a legal pack is really important when buying a property at auction. You have to be very brave (or perhaps a little foolish) to buy a property without first reading the legal pack.
4) Buy Properties In Different Areas
Another good method for reducing risk when investing in property is to ensure you purchase buildings in different areas.
To begin with, this may just mean different areas of a single city. However, longer term you should be looking to grow your portfolio over different areas of the country (and to go a step further, buying in different countries, too!).
By doing this you spread your risk so that if one area experiences a downturn in property values, you still have properties in other areas to cushion the blow.
It’s not uncommon for one area to experience a downturn if a major local employer closes or moves from the area or if a lack of investment causes an increase in crime. For that reason, buying properties in different areas is very much recommended.
5) Buy Different Types Of Property
From flats to houses to HMOs, there are a wide range of types of property available.
Buy ensuring your portfolio contains a good mixture of property types, you’ll protect yourself from any changes in regulations or popularity of a type of property.
For example, the rules for HMO properties regularly change. If your property is entirely HMOs then that can cause major headaches.
However, if you don’t have any HMO properties then you may be missing out on the substantial rewards they can bring in terms of income.
A healthy portfolio will have a balanced range of property types.
6) Buy To let AND Buy To Sell
Many property investors are either exclusively buying to rent out, or exclusively buying to renovate and resell.
So, should you buy to let or buy to sell? There isn’t really a right or wrong answer to this but many savvy investors do a mixture of the two.
Buy to let properties are great for growing your portfolio value and benefitting from any long-term value increases. In many ways, they are a great way to build a ‘pension pot’.
On the other hand, buying a property to renovate and sell on can give you a fast return and improve your cash flow. They are great for the relatively short-term ‘wins’.
Many property investors start by doing up properties to sell on to build up their capital and then eventually move to become landlords.
By doing both together you are able to better respond to changing market conditions. You are also securing both a short and long-term income.
7) Buy A Mixture Of Residential & Commercial Properties
The value of residential properties and commercial properties do not always rise and fall at the same rates.
Our ever-changing high streets mean that commercial properties can quickly rise or fall in value. For instance, if a major branded store opens or closes, it can impact the value of the surrounded properties positively or negatively.
This can happen entirely independently of what the residential market is doing.
Equally, residential property can change in value based on many factors that don’t really apply to commercial properties.
So, to reduce your risk as much as possible, aim to own a combination of residential and commercial properties. This will help protect you against any unexpected falls.
8) Look For Properties Being Sold Under Value
This seems an obvious one but if you see a property that’s clearly being sold under value, snap it up.
That doesn’t mean rush in and buy it without giving it property consideration. Yet, it does mean that when there is a genuine reason as to why you’re able to buy the property at a knock-down price, you should take the opportunity.
Of course, such properties don’t come around very often. But, when they do, they give you a lower risk as the property can literally increase in value the day you collect the keys.
9) Get Multiple Quotes For Any Work That Needs Doing
When buying any kind of property, you should always be aware of the level of work you’ll need to carry out to get it up to scratch.
Sure, you may be in a position where you can carry out much of the work yourself, but you’ll still need to price up materials.
For work you cannot complete yourself, you’ll need to hire the experts. Getting quotes from at least 2-3 companies or tradespeople for the work that needs doing will ensure you avoid any nasty surprises.
Equally, if you suspect the property is suffering from subsidence, damp, or other issues that would require substantial work, get it investigated by an expert before putting in your offer.
10) Play To The Market Conditions
Having an awareness of the current health of the property market, not just nationally but locally too, will also help you avoid to much risk when investing in property.
The UK market has a great track record of growth, but, along the way, there have been numerous sudden falls in prices.
Understanding where average prices are at the moment and where they may be likely to be over the coming months and years will help you stay one step ahead.
Predicting a fall in house values? Maybe now’s a good time to sell up and wait for an opportunity to buy back in.
Predicting a rise? Getting your cash flow right and snapping up as many properties as you can before prices increase too much could be a wise strategy.
Of course, predicting the future is much easier said than done. But, if you at least have an understanding of the current factors affecting the market you at least have a fighting chance of maximising your opportunities.
11) Find The Right Finance Deal
If you are buying entirely with cold hard cash, this one won’t really be a concern. However, if you’re buying property using any kind of finance, take heed.
Not all types of finance were created equal. Money lent over shorter terms often comes with high interest rates. Yet, locking in lower rates by committing to lending for longer periods of time gives you less flexibility for the future.
That’s not to say shorter terms are better than longer terms or vice versa. The right kind of finance deal for you will depend on a number of factors, not least your current situation and future plans.
However, getting the right finance deal for you will help you reduce your risk by ensuring your level of exposure is exactly what you’re comfortable with.
The Key Message Is To Spread Your Risk
As you’ve seen, spreading your risk is often the best way to reduce risks in property development.
Choosing to buy different types of property, in different areas, with a mixture of residential and commercial properties will help you diversify. It means if you have a problem with one property, the impact is cushioned by the ones without issues.
Of course, having multiple properties isn’t always an option.
When that’s the case, properly understanding what you’re getting in to by viewing the property and getting any quotes is your best move.
However, you decide to try and reduce your risk just remember that it’s never possible to completely remove all risk. If it were that easy, almost everyone would be doing it.