Having asked the relevant questions, you may identify a scenario that could happen. Whether it is, in reality, a worst case scenario is to some extent subjective and probably a matter of semantics. But if you have identified a possible negative outcome of owning a particular property, you will need to clarify what this means to you by asking three more questions, as follows:
- If it does happen, can I live with it?
- If I can’t live with it, what, if anything, will I be able to do about it if and when it happens?
- Knowing the answers to the first two questions, am I prepared to proceed with this purchase?
Now the answer to the last question will require you to dig a little deeper still before you can answer yes or no. You will have to ask yourself:
“Can I plan either to avoid that situation arising in the first place, or put a plan in place to overcome it if it does occur?”
The best way to use this process is to be as subjective as possible and to try and list as many potential problems as you can recognise that could result from buying this property. Don’t worry at this stage how likely or weird and wacky they are. If it is something that is troubling you, write it down.
Now look at each potential problem and consider how likely it is that this “risk” could occur.
If you are being honest with yourself you’ll be able to cross out many of the more extreme.
For those that are left then ask if you can live with that problem, should it happen. This may require doing some financial modelling which we’ll look at later. So for example, if your concern is that your tenants will leave every six months and that you have a month’s void between tenancies each time, what will that mean to cash flow? Will this still be a cash flow positive property? Will it be positive enough for your purposes?
If voids every six months mean the property is unviable financially then you need to ask the next series of questions:
- Can I plan to avoid that situation arising? – this might mean looking at your letting policy, determining you grant only twelve month tenancies or reconsidering the suitability of your letting agents
- Or can I put a plan in place to overcome it if it does occur? – if the resulting problem is financial this might mean looking at ways to cut costs between tenants or looking to see if you can raise the rent to compensate and so onIf the answers give comfort and seem reasonable you may decide to continue but if you think the problem is a real possibility and cannot be resolved or compensated for then you should pull out.
So you can see that through this process, in order to clear the log-jam of fear and paralysis of analysis, we have done a quick and rudimentary risk analysis and, on the basis of that, have started some contingency planning.
Here’s to successful property investing.
Peter Jones B.Sc FRICS
Chartered Surveyor, Author & Property Investor