10/01/2019
Property is generally considered a solid but low risk investment vehicle. Thus, while many investors are looking for places and types of properties, few have a comprehensive and structured risk management strategy
One of the cardinal rules of investing, regardless of asset class, is to make sure you have a well-documented risk management plan. Here are some of the most powerful risk management tools that can help reduce risks for real estate investors.
Insurance
It's a huge tool that any investor would be crazy to ignore. The types of insurance to keep in mind include:
Building and content insurance. This covers the replacement of buildings and damage to buildings and their contents, for example by fire, water or the like.
Insurance of the owner. This protects against losses related to tenant problems, such as loss of rent due to defaults, tenant damage and tenant claims.
Life insurance. It depends on the personal situation of the investor. Life insurance for a single person may not be necessary because there is no beneficiary. However, for a couple, with or without children, coverage must be in place to ensure the financial security of the remaining family members.
Income Protection. Not enough people have this blanket. If, for any reason, you become permanently disabled (in a car accident, for example), this coverage provides you with income of approximately 75% of your salary until age 65. Beware of much cheaper fonts covering you for only two years.
Insurance can be complicated, so it's important to have a good insurance broker.
Cash stamps
When structuring a strategy and a financial plan, an investor must always ensure that he has "buffers".
If you are releasing equity in a property in order to invest in a new one, make sure you do not use all the equity to buy the property. Keep enough money to protect yourself from unexpected expenses, interest rate hikes, and more.
I also recommend investors to have an additional reserve, usually in the form of a savings in a clearing account, for their personal expenses (medical emergency, purchase of a car, vacation , etc.). The amount of these pads will depend on many factors, but, as a simplistic example, I would recommend at least a $ 50,000 investment buffer when buying a property from $ 400,000 to $ 500,000.
Location
A common sense risk management strategy will be guided by the timeless theme "Do not put all your eggs in one basket". If you are building a portfolio, consider investing in different states. It reduces the economic risk associated with investing in a single state and avoids (or reduces) property taxes.
Cash Management
Investing in the property is a numbers game. In order to make a decision regarding the acquisition of a property, it is essential that you understand the impact this property will have on your cash flow. After all, you will have to deal with the cash flow of the property for 15 to 20 years!
It would be unwise to invest in a product whose cash flow would be negative of an amount that you could not afford. Cash flow forecasts must always be compared to actual figures to avoid any slippage. Cost / revenue research is important.
This seems basic, but many people do not know where to start or how to analyze these cash figures.
Council
The above is an important consideration, but there are many more about funding, legal structures and other issues. In my mind, the best risk management decision that an investor can take is to seek professional help in this area. There are some excellent, knowledgeable experts on the market, and any investor who does it alone certainly has the benefit of getting good advice on the conventional and costly mistakes that can be easily avoided.
Philippe Brach
is CEO of Multifocus Properties
and finances. He is experienced
Real Estate Investment Specialist
and mortgage broker
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