Risk management in South African buy-to-let

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One of greatest risks all investors face is their own human nature. In financial circles, this is called ‘investor risk’, referring to the fact that investors are often swayed by emotion – ranging from wild optimism to blind panic – which results in buying high, selling low, getting the timing wrong or abandoning long-term investment strategies in response to short-term market fluctuations.

While investor risk is a reality in all investments, a number of unique characteristics of the buy-to-let property investment game provide excellent protection against this particular risk.

The property market is far less susceptible to fickle investor sentiment and market volatility than, for example, the stock markets. Property values and rentals do not plummet overnight as share prices or markets do. They do not shield property investors from the erratic stock price movements, market bubbles and crashes that often trigger investor euphoria or panic. While economic conditions and market sentiment do impact the property market, the effect is lagged and, over the long term, rentals as well as property prices go steadily upwards.

Buy-to-let property is an illiquid investment, which means it cannot be acquired or disposed of in a moment of panic of euphoria. When acquiring a property, the process of obtaining finance inherently requires financial scrutiny and bank valuations, which provides some measure of protection against an emotional decision to buy a property which may not be what it seems. Similarly, a property cannot be sold on a whim, and obtaining valuations and offers prior to a sale provides the investor with some indication of whether selling is indeed the right option, or whether letting, subdividing, renovating or improving the property may yield a better return.

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By using proven step-by-step systems, such as IGrow Wealth Investments, smart property investors ensure they acquire the right property, place the right tenant and make the right decisions, every time.
A step-by-step system protects investors from acting irrationally, even when they are excited by the returns property investment yields and the many opportunities that are made available. It requires an investor to take the time and make the effort to gain a thorough understanding of the risks and rewards to rigorously implement proven risk management techniques.

Smart property investors do not rush out and buy just any property. Instead, they do a thorough due diligence check on each property and use custom-designed software, such as the IGrow Wealth Property Analyzer, to ensure the numbers add up.
This entails making provision for maintenance costs, interest rate increases and vacancies in their cash flow projections, building and maintaining a buffer fund or a ‘war chest’ to cover any unforeseen eventualities, and taking out rental insurance to cover any rental defaults.

Buy-to-let property investment, when using a proven step-by-step system backed up by custom-designed software, provides built-in protection against investor risk. It deters emotional decision-making by promoting caution and prudence, allowing investors to build up, steadily and responsibly, a small but highly profitable portfolio of quality properties.

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