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  • Stickies & Evergreen

    Is "Risk" a four letter word in property?

    [Image: 6a00d8341c03bb53ef00e5540bf4a38833-320wi]

    We don't seem to talk much about risk in property.

    It's an interesting topic because, generally speaking, across all investment strategies ...

    Low risk = low return

    High risk = high return.

    A friend of ours, Martin Skinner, has just posted this on Facebook:

    "We got our planning permission to build 112 flats at Green Dragon House in Croydon today! Woohoo, that's our biggest project so far. Magda & I put everything on the line again in a bet that we would succeed so it's quite a relief! Still got to build & sell them yet of course though ... ".

    I really take my hat off to Martin and his wife Magda for thinking big. I am sure that their project will be a success because of the massive housing shortage in Croydon which no doubt played a big part in their risk assessment of the project.

    It has inspired me to start this post actually. But also I watched a documentary earlier this week about treasure hunter Mel Fisher. He risked everything on finding the wreck of a Spanish galleon that was loaded with emeralds, silver, and gold. His motto was "Today is THE day". He spent ten years searching for this ship, and just as he was going to go down the pan, he found it and made him a multi-millionaire.

    Leverage is a double edged sword too.

    It can be used to accelerate returns, but when markets decline, leverage cuts both ways because losses can mount distressingly fast.

    To exploit any opportunities investors undoubtedly need to mix courage with patience and deep pockets, not to mention supreme confidence and belief in what they are doing.

    [Image: images?q=tbn:ANd9GcQUpSUSfuhXa-RMkj-jxgS...LDu8NPvhZ3]

    Some quotes about risk taking:

    “Only those who play win. Only those who risk win. History favors risk-takers. Forgets the timid. Everything else is commentary.”
    ― Iveta Cherneva

    “...maybe sometimes it's riskier not to take a risk. Sometimes all you're guaranteeing is that things will stay the same.”
    ― Danny Wallace, Yes Man

    “But if you're gonna dine with them cannibals
    Sooner or later, darling, you're gonna get eaten . . .”
    ― Nick Cave

    "If you do what you’ve always done, you’ll get what you’ve always gotten".
    -- Tony Robbins

    "If you’re going to be thinking anything, you might as well think big".
    -- Donald Trump

    "You can’t outwit fate by standing on the sidelines placing little sidebets about the outcome of life. Either you wade in and risk everything you have to play the game or you don’t play at all. And if you don’t play you can’t win".
    -- Judith McNaught

    "If things seem under control, you are just not going fast enough".
    -- Mario Andretti

    "Pearls don’t lie on the seashore. If you want one, you must dive for it".
    -- Chinese proverb

    "Go out on a limb. That’s where the fruit is".
    -- Jimmy Carter

    "Do one thing every day that scares you".
    -- Eleanor Roosevelt

    "In order to succeed, your desire for success should be greater than your fear of failure".
    -- Bill Cosby

    "If you are not willing to risk the unusual, you will have to settle for the ordinary".
    -- Jim Rohn

    "You get what you settle for".
    -- Thelma and Louise

    What is your attitude to risk in property and why? How do you assess and balance risk?

    [Image: house.png]Related content:

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    Great thread Vanessa,
    Due diligence eats up risk, with any developments we due, we research every detail so that we are confident the risk is minimised.

    Sometimes though you just cant minimise the risk and thats when you have o walk away, as an example, we are currently looking at a large commercial site which was valued in 2006 at £2M, we can buy it for a quarter of that but on the site are buildings totalling 80,000 sq ft which really need demolishing , all of the buildings have cement/asbestos corrugated sides and roof and the quotes for its removal vary hugely and contain so many caveats for additional charges. That coupled with a ground condition report that could also be costly mean we cant manage the risk so will possibly walk away.

    Phil Stewardson.

    Stewardson Properties.

    Stewardson Developments Ltd.

    Burson Land Ltd. & Jennings & Gilchreaste Ltd.


    Follow me on twitter - @philstewardson

    Thanks Phil.

    You highlighted an important point how intense due diligence can help mitigate risk.

    This means that some things that seem on the surface to be very risky, might, after intense research, turn out to be less risky.

    This suggests to me that due diligence of seemingly risky projects is a good way to find opportunities that others might dismiss.

    It also suggests that due diligence on low risk projects might reveal very high risks!!

    So due diligence is the anti-dote to risk either way. Very important point to come out of this post!!

    Ten tips to spot property deals others might have missed.
    Interesting thread Vanessa. Some of the quotes sound more like gambling than risk to me.

    I see due diligence as part of the identifying and assessing risk, putting in mitigation or control measures is all part of managing that risk and when you decide to go ahead with something or not. From a simple BTL view it could be: 30% deposits, 5yr mortgage deals, stress test cash flow, mix of different BTL properties for different target markets etc. That's just in relation to purchasing and the leverage/house price fluctuation risks that can happen.

    Phil uses a great example of where the likelihood of a risk (whether one event or a number of events) compounded by the potential catastrophic impact and effect makes the overall risk too high.

    It would be interesting to hear what other people do to mitigate their risks.

    This is how I see risk in relation to the title of this thread

    ``Risk`` is a four letter word in life
    Investing in property is a subsection of the risks we take in life

    Risk in Life is a sliding scale and everyone has there own scale.
    Everything is a gamble but we attach our own risk structure to it

    The risk on many things can be roughly calculated because of maths
    Where there is no obvious maths to rely on -
    we turn to history or the bookies
    We try to put the risk in context
    It can be very hard
    There are sometimes so many variables
    Property has many many variables
    Thats why the property forums are alive

    But we all are different so our starting premise is very different.
    So a risk to me will seem like a dead cert to others.
    We end up with heated debate because we just cannot see why the other person just doesn`t get it.
    Its because we all have different riskometers in our heads

    There is no right or wrong
    Its just a matter of opinion
    There are no absolutes in life

    Property Investment is really pretty simple.
    But its a risk as well
    Give 100 people 500K to invest in property
    The average person given 500K to invest could turn a profit.( Thats a complete guess btw just to demonstrate a point)
    But if the average is 50%
    Than means 50 wont and 50 will
    Make sure you are one of the 50 that will.
    The biggest DD should be on you.
    You are the risky unknown
    People are so fickle
    One day this
    Next day that
    Wouldnt want it any other way mind you

    If you work out you may not be one of the 50% who will turn a profit then you can still be a winner.
    Just spend some time selecting someone in the top 50% who will - and pay them

    If I tried to emulate Raymond Blanc in the kitchen I couldnt. So I pay him to do it for me and I still get to eat his expertise. All his 40 odd years of knowledge experience and skill is placed on the dish before me. All I have to do is to turn up eat it enjoy it and pay the bill. .Easy or what!

    Property Investment to me is easy
    Its a bit of maths then a numbers game
    Cooking a 5 course gastronomic delight isnt easy
    I would burn it or undercook it
    Its a massive risk
    Never invest in my cooking!
    But that`s just me
    Your riskometer is different
    Know your strengths know your weaknesses

    Look in the mirror

    Visit your Inner Sanctum

    And of course - Never Stop Thinking - Its free


    So to conclude:
    Property ( too me) isnt a risk so much
    Look beyond property

    The biggest risk in life is yourself

    Work on the risk in you
    Good Luck


    Jonathan Clarke. http://www.buytoletmk.com

    Thanks for the considered comment Omar.

    I posted a variety of quotes to try and show both sides of the coin.

    You make an interesting point ... when does risk become gambling?

    I guess the answer is that the very word "investment" means expecting a return on money you invested. Therefore, if you cannot guarantee a return, it is nothing more than gambling .. very high risk!

    I do have concerns that the wealth creation industry create hype and ra! ra! to encourage newbies to take big risks while not teaching due diligence.

    All the up-sides are highlighted, but no mention of the pitfalls. Newbies are incited to "take action" and "go for it!" and to ignore people warning them of the risks as "neg heads".

    It's finding that balance between risk and reward that is so vital to success of any investment.

    Yes, you're quite right! I am sure they are more than happy to take the fees but won't mention, as many do on PT, the need to have £'000s set aside as a contingency fund - of course if they did then their clients wouldn't have enough money to go ahead with their 'pitch' in the first place.

    You raise an interesting point that i had never thought, in that DD can also identify problems in low-risk deals.

    I was struggling to find the right word but antidote sums it up well,

    'Due diligence is the antidote to risk'

    Phil Stewardson.

    Stewardson Properties.

    Stewardson Developments Ltd.

    Burson Land Ltd. & Jennings & Gilchreaste Ltd.


    Follow me on twitter - @philstewardson

    I really do wish Martin and his wife Magda great success.

    I agree with everything that has been said but there are often things in the background that are not aware of and this is why I wrote my book this year.

    For my the worse four letter word in property is VOID

    The perfect Christmas present for property investors @ £4.64. My book, where I warn about the storm clouds that are gathering for landlords is available on Amazon title. Property For Rent – Investing in the UK: Will You Survive the Mayhem? https://www.amazon.co.uk/dp/1484855337
    Follow me on Twitter @landlordtweets
    Yes very interesting question/discussion that's quite pertinent right now...

    I have become increasingly astonished as to how many people are prepared to take a 'risk' on using the wrong mortgage. No where more so than in using ordinary buy to let mortgages for HMOs (not shared tenancies but full blown HMOs).

    To be clear:-

    This is a breach of your mortgage T&Cs
    This could lead to repossession - and yes I do know of this happening
    A lender I spoke to only this week said if they discovered such a breach they would give the borrower just 30 days to remedy the situation or they'd start repossession proceedings
    By breaching your lender T&Cs you're invalidating your insurance as your lender is a relevant third party to the policy
    At worse if the lender deemed you'd deliberately and fraudulently applied for the mortgage you could get a CIFAS fraud alert or even be prosecuted

    But this isn't what I wanted to discuss.

    When I was going over this at a recent event someone in the audience said 'but that's a risk of business'.

    My response was, no it isn't! A risk is getting into property investing in the first place, a risk is choosing LHA tenants over working professionals for example, a risk is doing a devt, a risk is packing in your job to go full time.

    A risk is NOT committing mortgage fraud, breaching lenders T&Cs or invalidating your insurance!


    Lisa All comments are for education and information purposes only and do not construe as advice or a financial promotion. No liability is accepted for comments made. If you wish to receive information in an advisory capacity then please contact me about becoming a client. www.keys-mortgages.com

    Risk has upsides and downsides, if you got nothing to lose then what looks like a big risk to someone else may not be for you.

    E.g. if you have one property:
    a) You can’t effort to pay the mortgage on it,
    b) Don’t have the savings to sort it out
    Then breaching lenders T&Cs so as to get the income to pay the mortgage may not be that much of a real risk, as it does not increase the downsides but make it less likely you will have to downsides.

    This is very different from choosing to buy a property when you are planning to break the lender’s T&Cs.

    Another example, we have a good life, so it is not worth us takings lots of risks to get more income. But having more income will allow my wife to go part-time, however she likes her job. As she is an accountant, she may not be able to every get a job if we are made bankrupt, other people will not have that much effect on their lives if they get made bankrupt. So our downside risks are more important to control the most people’s.

    Likewise taking on one LHA tenant is a risk, but taking 100 tenants on LHA giving 50% better cash flow is not a risk, as the better cash flow more than covers the downsides to LHA. (I still see it as a risk buying properties in an area were LHA tenants give more cash flow)

    At present I am looking at options for creating a HMO; however I wish it to be cheap to convert the property back into a single home, and a single rental to be able to cover the mortgage so as to reduce the downside risks. This does however reduce the upside risk of making more money than expected.

    E.g. the risk of not taking a risk may be more then the risk….

    If we were given the option of taking a gamble when the odds of winning were 90% and wining give us £50K more income per year, but loosing lost us £50K income per year. Then logically using conventional economics it is clear we should take the gamble, but as soon as you consider the effect on our life’s it is very clear we should not take the gamble.

    However for someone that has an income of £200K or £10K, it may be a good risk to take.