- Property investments face risks such as property value depreciation, unexpected structural or legal issues, and refurbishment cost overruns.
- Effective property risk management strategies include thorough property due diligence using tools like Lendlord’s postcode analysis, choosing a desirable location, ensuring accurate calculations, setting realistic budgets, buying below market value, and having alternative strategies in place.
Risk management in property is often overlooked, with only the most tuned-in investors recognising that mitigating risks is paramount to long-term success in the property market.
In this article, we will explore efficient strategies for reducing risks when investing in property and discuss the role of due diligence and analysis tools in helping us do so.
Understanding Property Investment Risks
Unlike stocks and shares where the only real concern is that their value decreasing, property investment comes with a few more risks that could turn a good investment sour. The most common risks are:
1. Property Value Depreciation: The property market is known for its cyclical nature. Property values can fluctuate over time, and unforeseen economic or regional factors may impact a property’s value. If you get unlucky and buy at the wrong time, or just purchase in a bad area, you could find yourself in negative equity as the property value decreases.
2. Unexpected Issues: Properties, especially older houses, have a habit of throwing a spanner in the works when you least expect it. These unexpected problems could be structural issues, the boiler breaking or legal complications (some older properties could even have restrictive covenants).
3. Refurbishment Cost Overruns: Refurbishments are a great way to increase the value of your property and are vital steps in strategies such as buy refurbish refinance and house flipping. However, if there’s one thing you can be certain about with a refurbishment is that it will go over budget and over time. If not accounted for at the beginning, this could affect overall profitability.
How to Manage Risk in Property Investment
Effective risk management in property investment requires a multifaceted approach that goes beyond the numbers. Following the below will help you reduce risk when investing in property.
1. Property Due Diligence
Due diligence is the cornerstone of effective risk management in property investment. It involves thorough research and investigation into every aspect of a potential investment; from determining the property’s market value to working out your potential monthly profit.
However, due diligence isn’t just about understanding the numbers; it’s also about getting to know the property inside and out. This involves visiting the property, inspecting it thoroughly, and having experts, like surveyors and building inspectors, assess its condition. You should also delve into the property’s history, including any past structural issues or disputes with tenants. The more you know about the property, the better you can evaluate potential risks.
2. Choosing a Good Location
The single most important factor that drives the success of your property investment is the location. Your property must be in a desirable location, and this doesn’t only refer to the city, but also the neighbourhood and postcode. If it’s not, your invested capital could be at risk as the property is unlikely to attract good tenants and appreciate in value.
On a city-wide level, you should consider factors such as the population, development plans and connections to other cities. On a local level, factors like proximity to schools, public transport, and amenities can significantly affect your investment’s success. Conduct on-the-ground research (even if on Google Maps) and speak with residents to gain insights into the neighbourhood’s nuances.
To learn how to do this step by step, follow our guide on choosing the best location for property investment.
3. Surveying the Property
Having a Level 3 RICS survey done on the property is vital when trying to mitigate your risk. It provides a comprehensive assessment of a property’s condition, highlighting any structural or maintenance issues that could lead to unexpected expenses. While this survey comes at a cost (between £630 and £1,500), it’s a smart investment to safeguard your capital.
4. Ensuring Your Numbers Are Correct
Inaccurate calculations can spell disaster for your investment. Utilise tools like our buy to let analyser or its house flipping variant and due diligence checklists to ensure your numbers are precise. Double-check your budget, estimated end values, and potential costs related to renovations, repairs, or maintenance. Being meticulous in your calculations can prevent unwelcome surprises down the line.
5. Realistic Budget Setting
Refurbishments often involve unforeseen expenses. That’s why setting a realistic budget that includes a contingency fund is essential. A contingency fund, typically around 20% of the total estimated refurbishment budget, provides a financial cushion for unexpected costs. It’s a prudent approach to deal with any unforeseen issues that might arise during your investment.
6. Buying Below Market Value
Purchasing properties below their market value not only increases your profit potential but also acts as a risk mitigation strategy. Even if market conditions take an unexpected turn, your investment remains resilient, offering a buffer against potential losses.
Securing below-to-market deals is not an easy feat and requires great negotiating skills so we’d recommend checking out our guide on how to successfully negotiate house prices – there are a few golden nuggets in there that could make this easier.
7. Having a Plan B
The property market can change, and your initial investment strategy might not always go as planned. That’s why it’s wise to have a backup plan or alternative strategies that you know will work for your property. For instance, if your original intention was a long-term rental, consider the possibility of converting the property into a holiday let or a HMO.
Likewise, if you’re aiming to flip the house, ensure that the buy refurbish refinance model would also work in case you’re not able to hit your end value or have a change of heart.
8. Choosing Reliable Financing
Selecting reliable financing options that cater to your investment goals and the particularities of the property is crucial. You don’t want to find yourself in a position where you can’t finance the amazing deal you’ve just found for one reason or another.
Whether you’re considering a buy-to-let mortgage or a bridging loan, work with trusted financing providers. Look for competitive interest rates, flexible terms, and transparent costs to ensure your financial stability throughout.
Consider checking out our trusted finance provider Lendlord.
Remember that robust due diligence is the foundation of risk management in property. Property analysis calculators and free tools can provide valuable insights into your potential investments.
Additionally, educate yourself using our comprehensive guides and checklists to ensure that your research is thorough and accurate.