What are the risks to building a property portfolio?

What are the risks to building a property portfolio?

  • Posted by: Redom Syed

What are the risks to building a property portfolio?

 “It’s what you don’t know that will hurt you most.”

Building your portfolio wont reap you the rewards you seek.  Holding onto it, protecting it, and allowing the portfolio to grow will.  Protecting your portfolio is all about knowing where the risks lie.

While growing, your portfolio is often the number 1 goal and easiest part to think about, building wealth won’t be possible if you don’t protect your portfolio.

Understanding and appreciate the ‘downside’ is the key step to managing it.  It’s what you don’t know about your property portfolio and the market it operates in that will hurt you the most.

Investors that are prepared and have risk mitigation strategies in place will fare much better than those caught off-guard.  Much of the risk mitigation strategies are precautionary, not reactionary.  That is, you need to prepare early.  The pain associated with acting when things go bad will be far worse than those that are well protected and have risk mitigation strategies in place.

To be clear, ‘risk’ is not necessarily ‘bad’. Taking on risk and leverage is often the very reason why you have wealth to protect in the first place.  That’s why property investors need to think about ‘managing risk’, not ‘avoiding’ it altogether.

The extent of the risks will depend on the nature of the assets you hold as well as the way they are financed.  The key risks to growing a portfolio can be broadly categorised into four key categories

  1. Interest rate risks: risk of repayments increasing as a result of interest rate rises
  2. Financing risks: liquidity & cash flow risks associated with how you finance your portfolio.
  3. Property risks: Risks associated with the property itself
  4. Personal risks: Individual risk impacts your ability to grow a portfolio. If you lose your job, how will your property portfolio perform?

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