What’s your risk appetite?

Risk and reward generally go hand in hand, particularly when it comes to investing.

Interestingly, gambling demonstrates risk and reward superbly. Consider roulette; betting on either black or red gives the gambler a much greater chance of winning. The gambler’s chances would be 1.111111 to 1. However if the gambler chose just one number on the roulette wheel, their chances of winning would be 37 to 1.

When the gambler takes a higher risk and opts to bet on the less likely outcome, they put their money at stake.

However they claim a far bigger prize if the outcome falls in their favour.

I’d like to suggest that gambling has no relationship with property investing, but the reality is that property investors who are primarily investing for capital growth are in fact betting that the market will continue to grow. Successful property investing requires discipline, knowledge of the market, cash provisioning for problems and a consistent, ongoing reliance on educating oneself. I prefer to call it an educated bet.

There is risk in any type of investing. From stock market crashes to banks or lending society collapse, it is naive for an investor to assume that an investment model only carries upside.

Even for someone who has chosen the least risky place for their money will lament CPI exceeding their savings’ interest rate.

Asset classes carry their own sets of risk, and property is no stranger to risk. Whether an investor is highly geared, or exposed to one market without diversification, property risk comes in all shapes and sizes. Some investors who have bought in mining towns will share their difficult learnings, and others who have experienced developers going into liquidation will be well-versed in telling others to heed their warning. The list is long, and there are plenty of upsetting situations out there that property owners have found themselves trying to salvage.

An interesting risk that comes up often relates to market cycles.

Many investors attempt to ‘time the market’. This is quite difficult to do, and often it’s an accidental effort when they retrospectively look back. Take 2019 for example; following our credit squeeze and the Banking Royal Commission, polls suggesting that a labour Government would win plunged property market sentiment into the negative between February and May in particular. I was working with only a few clients at the time who saw this period as either an opportunity, or had made the decision that their investing was for the long term, (and as such they’d ignore market cycles). This blog reflected on some of the successes we helped with after the surprise election result stimulated our market back into positive consumer sentiment.

Little did we realise that we had another downturn only ten months away again. This time, COVID-19 struck and unlike the 2018-2019 downturn which spanned around 16 months in Melbourne, the COVID-19 impact on the Melbourne property market was far more rapid. Our buying activity was not completely limited but we certainly had a strong number of clients place their searches on hold, as noted in last week’s Bulls and Bears Sunday blog.

One client, however decided to counter to the market. He purchased not one, but four properties in this tight timeframe. He had made a decision to buy at a relative discount and to target quality property.

His first acquisition was an off-market Victorian single fronted cottage in Flemington with a north facing rear, just 4km north west of our CBD. We secured the property on a short settlement for $895,000 and it rented immediately upon settlement.

His second acquisition was another period property in the heart of Yarraville Village with, (again) a north facing yard. This 2BR plus study home needed some work, and a long settlement to suit the vendor allowed him to scope and quote for painting, carpeting and kitchen and bathroom improvements.

The renovations went to plan and his ability to manufacture some growth, combined with the reversal in market sentiment have likely given this property the strongest value increase of all four assets.

His attention was next turned to Geelong West, where he secured two properties. This off-market house on Candover St had a superb floorplan and a dated heritage style interior. Lending itself to an easy ensuite conversion was part of the attraction for our savvy investor, but it was the side lane access and north facing rear that scored it highly. The property rented immediately on settlement.

The final acquisition in Clarence St was most tempting due to the opportunity to again manufacture growth via a cosmetic renovation. The property is still tenanted and will remain so until such time as the tenant chooses to vacate, upon which time our investor will tackle an upgrade.

And it appears our investor only buys property with a north facing rear aspect.

Little did we know how strong Geelong’s market would perform in the face of COVID-19. Melbourne’s prolonged lockdown measures saw a spike in internal migration, and in tandem with the already-strong popularity of this city by the bay, Geelong not only remained resilient but exhibited growth.

This astute Sydney-based investor did what many pivoted away from. He saw an opportunity to buy advantageously and did so. More importantly though, when I challenged him about how he weighed up the risks, his response was intriguing, robust and made a lot of sense.

“Once you can afford it, this is actually the best time to purchase and NOT aim to time the market.  Fair to suggest buying in COVID-19 would not have appeared to be the best time, however, if you have confidence in the property market (long term) and buy a quality property, these examples demonstrate the resilience of property and rental returns.”

His point is simple. It’s not about timing. It’s about selecting quality assets and investing for the long term.