Balancing the risk reward ratio

When considering any property investment you need to balance the risk/reward ratio to at least give yourself a chance of obtaining a suitable return. The simple fact of property investment is the earlier in the development process that you invest your money the greater the risk but the greater the potential reward. The risk/reward ratio will vary for each and every property investment you come across and you need to weigh this up against your own finances and your own financial position.

Does it fit with your investment criteria? Does it fit with your investment timescale? Is this a good mix with your existing investments?

Off-plan investments

Off-plan property investments are literally projects which have yet to be started and therefore offer the greatest degree of risk. There are a variety of risks which include the specific risk of the developer finishing the project, a change in the local economy, the national and worldwide economies not to mention potential changes in your own financial situation which could impact your financial strength going forward.

When looking at off-plan investments it is vital that you arrange to stagger any agreed capital input to ensure that the developer is as incentivised as possible to finish on time and as little of your capital as possible is put at risk. This all looks very simple on paper but it can be a minefield although a minefield which can prove to be extremely lucrative if everything goes to plan.

Joining further down the development chain

The greatest risks to any property development are that the project actually gets off the ground on time, in an orderly fashion and is completed on time and on budget. Many people will try to avoid off-plan projects in the early stages until they actually see the projects have started and then they will join the investment chain further down the line. This may mean buying out early-stage investors or injecting capital for an agreed percentage of the overall development. However, the chances are that the perceived value of joining the development chain further down the line would be lower than for those investing at an earlier stage.

As a consequence, the perceived risks will also have reduced which is how the risk/reward ratio plays out.

Getting the right mix of investments

While any stand-alone investment may have its attractions, may look good value and offer a significant potential return, you need to have the right mix of investments in your portfolio. There is no point in skewing all of your investments into a particular niche market because if this niche market was to fall then this could decimate your property portfolio, cash flow and place significant pressure on your finances. There are various calculations which will show the perceived risk/reward ratio for any investment and also a combination of different property investments. However, it is not very difficult to see which market will move at different speeds, which offer short-term attractions and those which have a longer term value.

Those who attempt to “put all of their eggs in one basket” are often those who do very well in the good times but are left decimated in the difficult times. In many ways long-term property investment is like the “tortoise and the hare” in that it is not always those who set off the quickest who arrive first at their intended destination.

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