How to identify and assess risk in property

When it comes to investing in property, identifying and assessing risks is a critical step in making informed decisions and safeguarding your investment. Understanding potential risks allows you to take appropriate measures to mitigate, avoid, or accept them based on their severity and likelihood. This article will guide you through the process of identifying and assessing risks in property investments and provide insights on how to take action through risk mitigation, avoidance, or acceptance.

Detection – The first step in assessing risk in a property is to first detect risks that are likely to occur these may include the likelihood of a natural disaster in an area, the likelihood that a tenant is to default or vandalise a property, or the likelihood that a property will be worth less in in value in the future. Detecting risk can be done through careful research and analysis of available data historical trends and through leveraging the experience of professionals in the industry.

Severity – once you’ve detected all the potential risks in an investment property the next step is to understand the severity of that risk in the event that it was to become a reality. This is essentially understanding what the worst-case scenario is if this risk were to become reality. You can understand this through careful research and analysis of previous occurrences in other scenarios and understanding the financial and non-financial cost of that particular scenario. For example, in the event that a natural disaster such as a flood or fire were to occur, and your investment property would be damaged to the point of complete this repair what would be the cost of a total rebuild of that property.

Likelihood – the last step in identifying risk is to calculate as best you can the likelihood of that potential risk occurring. This can be done again through careful research and analysis of each of the risks that you’ve identified and that way you can understand whether you would like to mitigate, avoid or accept the risk of this particular outcome occurring. For example, if a particular area has a history of flood or bushfire that has a high severity but a 1 in 100-year likelihood then you may choose to either insure against this risk or accept the risk occurring depending on your risk appetite.

Mitigating, Avoiding & Accepting Risk – Now that you fully identified each of the risks this severity and likelihood, you can begin to take action on each of these risks by either mitigating, avoiding or accepting each of the risks.

• Mitigation: Mitigation of risk refers to the process of taking proactive measures to reduce or minimise the potential for negative impacts of risks. As an example, if you are considering investing in a property that is in an area prone to flooding, you could reduce the likelihood of the financial cost of this risk by purchasing comprehensive insurance with flood cover, engage a professional surveyor to assess the property’s susceptibility to flooding or putting flood Prevention such as flood barriers, drainage systems, and sump pumps. These precautions can help minimise potential flood damage to the property and protect its value.
• Avoiding risk: This involves consciously opting out of property investments that have a high likelihood and severity of negative outcomes. Let’s say you come across a property investment opportunity in an area with a history of high crime rates and declining property values. Upon thorough analysis and consideration, you decide to avoid this investment due to the potential risks involved.
• Accepting Risk: Accepting the risk in and investment property, is essentially deliberate decision to proceed with an investment despite acknowledging and understanding the potential risks involved. Let’s say you come across an investment property in an emerging neighbourhood that shows promising signs of growth and development. Despite the potential risks associated with investing in an area with limited market history, you decide to accept the risk and proceed with the investment.

Identifying and assessing risks in property investments is a crucial aspect of successful investing. By carefully detecting potential risks, understanding their severity and likelihood, and taking appropriate action, investors can navigate the complex landscape of property investment with greater confidence. Whether it’s through risk mitigation, avoidance, or acceptance, investors can tailor their strategies to align with their risk appetite and investment goals.

Remember that risk management is an ongoing process that requires continuous monitoring and adaptation as market conditions evolve. Stay informed, leverage available data and expert advice, and always evaluate the potential risks against the potential rewards. With a comprehensive understanding of risks and a proactive approach, you can make well-informed decisions and increase the likelihood of achieving favourable outcomes in your property investment journey.

Ultimately, each investor’s risk tolerance and investment objectives will determine the appropriate approach to managing risks in property investments. Always seek professional advice and conduct thorough research to make informed decisions tailored to your specific circumstances. By adopting a thoughtful and proactive approach to risk assessment, you can set yourself up for success and maximize the potential returns on your property investments.