Risk is a funny thing.
Some of us embrace it, some of us try to steer clear of it.
But like it or not, very few things in life are risk-free.
And of course, property is no exception.
Honestly, I think some property people have completely unrealistic expectations when it comes to risk.
Now, full transparency: on the risk scale, I’m quite high up near the risk-taking end.
If the scale were 0 to 10, I’d guess I’d be about an 8.5, maybe even a 9, at least when it comes to money and finance.
Not so much with physical activities, where I’d probably be a rather pathetic 3, but that’s not the point.
And again, full transparency, not every risk I have taken has worked out.
But surely that is the whole point with risk.
If things were guaranteed to work out, even when you took a risk, it would not really be a risk at all.
When you take a risk, you need to accept and understand that it might not work out.
This is something I have thought about a lot over the years.
You may know that for many years I used to help out at a well-known property training company, mainly helping to run one of their flagship property trainings aimed at beginners.
And here is what I found from being in training rooms with a combined total of well over 1,000 students.
At almost every training, there was usually someone there, and quite often several someones, who wanted to learn about property, but were determined to do it only on their own terms.
And very often, the non-negotiable term was this:
It had to be risk-free.
So during the breaks, or over lunch, or at some point over the weekend, there would be a trickle of delegates saying words to the effect of:
“Are you going to show us how to do property so I don’t have to take any risks?”
And if it was not them asking for themselves, it would be a partner or significant other saying something like:
“I’ve let him or her come on this training, but only on the understanding that they won’t end up taking any risk afterwards.”
I was remembering this the other day while listening to the audiobook version of How to Get Rich by Felix Dennis.
I’m only a couple of chapters in, but so far it is a delightful listen. Very autobiographical, in an interesting way, and not at all what I was expecting. Much better, in fact.
And at one point he came out with this pearl of wisdom:
“The ability to live with and embrace risk is what sets apart the financial winners and losers in the world.”
No doubt, if I had quoted that at one of those training weekends, a minority of delegates, or their partners, might have been very offended by the use of the L-word.
But like it or not, Felix was really stating a simple truth.
Because what those delegates did not understand is that return, and I’m talking principally in a financial sense here, is the reward for taking risk.
At a simplistic level, you cannot have reward if you have no risk.
Or put another way, you will not get the reward of a return if you refuse to take any risk at all.
There has to be some risk.
Even in property, which is generally considered one of the less risky investments, assuming you do proper due diligence.
And that is one reason banks are reasonably willing to lend against it, whereas they would not lend so readily against other, much riskier, types of investment.
And that is also why, although we all moan about interest rates and mortgage rates, and I do enjoy a good moan about those, the rates charged on a mortgage are actually still fairly cheap in the grand scheme of things.
At least when you compare them with what you would pay if you were trying to borrow against a much riskier type of asset.
As I write this, I realise there is probably even more to this.
Risk and reward are not linear.
It does not work like this: take 50% more risk and get 50% more reward.
Life is rarely that tidy.
Chances are the 80/20 principle applies here as well.
A little more risk may create a disproportionately greater reward.
But equally, taking a lot more risk may only produce a relatively modest extra reward.
That is probably a subject for another day, when I have had more time to think it through properly.
Going back to property, it does explain why so many people looked disappointed when I taught them one of the basic truths about buy to let.
It would go something like this.
“So you want to make income from property, a good income?”
“Yes.”
“OK, so what is the best type of property for producing a good income?”
“A property with a good return.”
“That’s right. So what sort of property is that?”
Blank faces.
“Generally speaking, it is a cheaper property, yes?”
Puzzled looks.
“Why?”
“Because the returns from a cheap property are higher. The rent, as a proportion of the purchase price, is higher. Or looked at another way, you are paying less for that property to get that amount of rent.”
Nodding heads.
“OK, I think I get that.”
“So cheaper properties give a better or higher return, at least in terms of rent, than more expensive properties.”
“OK.”
“So here’s the next question. Why are they cheaper?”
And this is where the penny usually starts to drop.
Because the answer is basically supply and demand.
Those properties are cheaper because fewer people want to buy them.
And cheaper areas are cheaper because, for all sorts of reasons, fewer people want to live there.
Which then leads to the obvious conclusion.
If the best returns often come from cheaper properties in not-such-nice areas, then yes, those properties may be somewhat riskier.
Not necessarily wildly risky, because you still do your due diligence and try to minimise the risk.
But riskier, yes.
And that is the bit some people really do not want to hear.
What they actually want is this:
They want high-priced, higher-quality properties in really nice, expensive locations that give them really high returns, but bought at the same price as those cheap properties in the not-so-nice areas.
In other words, they want the return without the risk.
And property, rather inconveniently, does not usually work like that.
So what I ended up having to say, as gently as possible, was this:
If you do not want the risk, then be prepared not to get the return.
In fact, it may be that property, and maybe investing in general, just is not for you.
Because no matter what property you buy, there will always be some risk.
Yes, you can minimise it.
But you can never eliminate it altogether.
And that, really, is the key point.
Risk-free property investing is, to all intents and purposes, a fantasy.
What you can do is understand the risk, reduce the risk, price the risk properly, and decide whether the return is worth it.
That is grown-up investing.
Not pretending the risk is not there.
This isn’t advice, of course. Just a reminder that if you want the returns, you need to accept there will usually be some risk attached — and your job is to manage it, not fantasise it away.
Here’s to successful property investing.
Peter Jones
Author, property investor and ex-Chartered Surveyor
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