Risk Assessment

[Kevmeister]

I'm curious what kind of risk assessment people do in connection with any IP that they purchase. Assuming they have done a reasonable degree of due diligence in respect of expected rental returns, vacancy rates for the area, new housing, etc.

I know there is always the possibility of losing my job, but putting that to one side, what kind of metrics should I consider reasonable in a risk assessment? Such as:

1. Make sure I can afford the payments on an IP even if I do not have a tenant for an entire year, or for how long, or what vacancy rate?

2. Four weeks per year, six weeks per year what?

3. Potential interest rate rises - how many percent?

4. Potential unexpected maintenance costs?

I know this is partly a case of "how long is a piece of string" because it depends on my risk "profile".

Obviously the last thing I want to do is lose existing assets if an IP ever turned sour (no different to any other sane person I guess) so I'm just really trying to gauge where other's sit in this regard.

Cheers

Kevin.

 

[Lotana]

Kev,

The answer will be different for different people. Everybody has his/her own psychological risk tolerance profile. I personally would feel very uncomfortable if I couldn't tolerate 3 months vacancy with 3% higher interest rates.

It also helps to have a back out strategy. What if you loose your job and a tenant at the same time? Have a plan (in IT this is called "disaster recovery plan"). Would you downsize you residence but keep your IPs? Would you sell some of the IPs? Would you release more equity? Refinance with no-frills product to reduce interest rate? Would you move back to parent's place ?

Say cheese

Lotana

 

[Kevmeister]

I guess the other interesting issue with this question is that IP's bought "today" might be positive cashflow but tomorrow might become negative cashflow after a change in interest rates, a market flattening/downturn etc.

He he ne "advantage" (perception-wise) (I say this tongue-in-cheek) of -ve gearing if that you already possess the perception that you are going to fork out money! Just a case of how much. I wonder if anyone ever got burnt thinking their IP was positive cashflow until a change in interest rates made them realise it would not always be so?

 

[GoAnna!]

Hi Kevin

Great topic. Risk is as important (maybe more so) than all the up sides of property.

Some of the things I consider are

THE WORST CASE SCENARIO

What if I was forced to sell? Would this property be easy to sell? If not then what could i do to improve that?

How long will it take before i have net equity in this property? (this means if i am forced to sell I will still be in front)

OTHER BACK UP PLANS

Do I have equity in other assets? Do I have access to quick cash through LOCs or credit cards? Do I have enough to get me through a period of unexpectedly low rent or high costs.

What makes this ip more attractive to renters than other ips? Is this kind of dwelling in short supply and high demand? Or is it one of thousands and with nothing to make it stand out from others?

THE BEST STRUCTURE TO BUY IN

Given my plans for this particular ip what would be the best structure to buy it in?

DO I HAVE ALL RELEVANT INSURANCE IN PLACE?

this might cover

building

rent while rebuilding

fixtures and fittings

landlord

income insurance

life insurance

??


Basically I try to ask myself "What if?"

And how can I manage that "What if"

Hope this was of some help.