Managing risk is all part of a smart investment strategy – and OpenCorp has a wealth of advice to help investors.
When it comes to property, ‘risk’ and ‘mitigation’ are the yin and yang of your investment strategy.
You can never completely remove risk – but you can do plenty to balance it out.
Mitigating strategies should be part of your investment plan – and drawing on the experience of OpenCorp’s trusted advisers.
The two main planks underpinning your strategy are making sure your cash flow is stable, and being protected from any nasty maintenance surprises.
When it comes to the latter, we’ve seen this in recent years with the Opal Tower in Sydney, where major cracking meant tenants had to be moved and people’s assets went down.
You could have bought one of those apartments the day before that defect was uncovered. You’d have no idea that was going to happen – then bang, your plans are in tatters.
If you’re buying an established house, get a reputable company to come and do a building inspection before you make an unconditional offer.
At OpenCorp we love new houses because we’re not taking on a historical building and all its potential flaws.
Investing in a newbuild is a familiar strategy for OpenCorp clients – building standards keep getting more stringent, so we know a property is going to be built to a standard that will withstand the test of time.
But we’re also picking up a builder’s warranty, so if anything doesn’t quite work out structurally it gets fixed and it’s not on us.
With an older home, sometimes there’s a retrofitting cost to bring that up to the standard required to be able to lease the property.
The unsuspecting investor will jump in because they see something they like when they walk around the block near their home. But you shouldn’t judge a book by its cover, and we hear plenty of horror stories – here’s one from OpenCorp Executive Director Michael Beresford.
“I remember helping an investor in Bentleigh (suburb of Melbourne) who couldn’t get past his emotional bent to be investing where he lived,” Michael says.
“This was 10 years ago – and he bought a property for $685,000. Within the first 12 months, it needed restumping but he didn’t have the extra $35K buffer required to cover that; the tenants moved out when the lease ended, and as a result, he wasn’t able to service the mortgage without the rent. He ended up selling it for $615k in what was basically a fire sale.”
So, get that building inspection done and make sure you understand the cost to rectify any problems – and if you can, pass those back to the vendor.
A sound financial base is also essential – if you have a cash buffer (and you may need to tap into the equity you’ve created), you have the capacity to handle some maintenance.
OpenCorp Group CEO Matt Lewison recounts his own experience.
“I’ve had a property for 20 years and a leak spread, got behind the shower and the whole bathroom had to be redone for about $20,000,” he says.
“Insurance covered much of it, but we lost some rent as well, so were probably seven grand out of pocket. Then again, we’d owned it for 20 years so if you average that over the life of the property, it’s only about $350 a year, which isn’t a lot. But supposing we’d sold it a month before that happened, some poor investor could have inherited that big problem. It’s about managing those risks.”
A key part of managing your risk is managing your finances. If your interest rate isn’t fixed (and we’re not suggesting everybody fixes their interest rate), you need to make sure you’ve got a buffer to service a higher interest rate.
The other thing is to choose your tenant wisely. A bit like the Australian cricket team, once they’re in there, it’s hard to get them out.
Manage all those risks, mitigate accordingly, and reduce the chance of them adversely affecting your investment.
