Risk is everywhere.
You are susceptible to risk when you drive to work, walk to lunch, and everything in between; some of it you can control, and some of it you can't.
When it comes to investment risk, there are certain elements you can control and some you cannot. Once your money is invested in the property market, you are in some ways at the mercy of that market and your returns will be dictated by the performance of that market.
When looking at property investment, one of the single biggest factors at play is time. How much time you expect to have in a market determines the correlation between how much risk/scale/leverage you can take.
Property investment is a long-term game and investors that speculate on short-term gains are the ones that are taking the most risk when they invest their money. Time informs the scale and level of speculation that is appropriate for your portfolio.
Consider the example below. Here we have two different people at different stages of their lives:
A 60-year-old who wants to retire in five years
A 30-year-old who wants to retire at 65
What level of risk can these two different people take?
A 60-year-old who wants to retire in five years wouldn’t spread their surplus income across four properties. They would be likely to buy one, put cash into it, and aggressively attack the mortgage with principal and interest repayment (amortisation). Potentially, also use some of their KiwiSaver payouts to finish the loan repayment to produce an inflation-resistant, income stream in retirement.
A high-income 30-year-old could justify focusing solely on their own mortgage and using the equity in the property to grow a multi-property portfolio, leveraged to 100 percent. Those loans would be “interest-only”. With a 35-year investment horizon, there will be multiple cyclic “booms”. Usually, these investors seek a cash-flow-neutral portfolio and that is what justifies their choice of typology.
It's clear that someone who is close to retirement would be much more inclined toward a low-risk approach where there is less reliance on market change. On the other hand, someone who has more time can afford to take a lot more risk and leverage their assets highly.
To find out how much risk you can take, talk to an expert and figure out some future investment goals to best understand your investment horizon. Then, and only then will you be able to determine an appropriate risk level going forward.
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We help Kiwis build wealth through property investment. Our advisors will take the time to understand your individual needs and recommend suitable investment properties to help you build wealth and set up your retirement.
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