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Investment: Understanding risk

Risk is the chance that events will not turn out as expected. Our approach to risk is determined by many factors, but the main influence is clearly our character, personality or profile. We are all very different and as such will not tolerate risk uniformly. Some people avoid risk while others get a real thrill from it.

What determines your attitude to risk in investment terms?

• Age
• Upbringing
• Family
• Past experiences
• Future expectations
• Goals
• Overall wealth

Risk and reward

It is worth noting that higher risk is associated with potentially higher rewards and lower risk attracts lower rewards. The savvy investor strikes a happy medium and spreads his exposure to risk and reward with a combination of investments. This is known as a portfolio approach, which can be defined as ‘minimising risks while maximising returns through diversification’.

Your approach to risk is personal and is highlighted through investor profiling.

Remember that risk and reward go hand in hand. In fact, replace the word reward with ‘opportunity’ because this reflects more accurately the reality you face.

The reality is that one day soon you will be faced with an opportunity. It may be in the form of land purchase in Mauritius, off-plan in Morocco or in a syndicated joint venture project in Moscow. Whatever it is, you will be faced with an opportunity and opportunities generally carry a risk to your capital. It’s how you deal with opportunities which will determine your success as a jet-to-let investor.

It’s by thorough research, analysis, planning and hedging that you mitigate risk. In life we face risks and learn to deal with them on a daily basis. So why can’t we do that with property investing? Well, we can.

There are a number of potential risks involved with jet-to-let investing which this article terms, ‘total risk’. It includes everything from just being in the property market, to a tenant falling down the stairs and suing you.

Let’s have a look at the risks you must look out for and the questions you must ask yourself when considering jet-to-let or property investment in general.

Risk checklist

• Political risk
• Is the government of the country you are investing in stable or on the brink of a revolution?
• Are there any factors which may contribute to that government becoming unstable?
• If it becomes unstable, what might the implications be for foreign investors?
• Would a future government confiscate land and property or other assets held in the country?

• Opportunity risk
• Are you missing a great financial opportunity by not investing in overseas property?
• Are you investing in the wrong country or property for your strategy?
• Is your equity working as hard as possible for you now that your investment properties have increased in value?

• Market risk
• Will the market crash or stagnate?
• Will other markets crash and have a knock-on effect in your market? In other words, is your market dependent on others, such as Spain and the UK?

• Liquidity risk
• How quickly can you turn your overseas property into ready cash?
• How strong is the resale market?
• Is there likely to be an oversupply of property in your chosen market and region?
• Will demand be sufficient in relation to supply, to maintain or even increase prices?
• Will a buyer purchase this property from you at the price you want?

• Business risk
• Is there a strong rental market for your property? Is it for holiday lets or longer-term tenancies?
• Is the demand from foreigners or locals?
• If foreigner-demand dries up, can the locals afford to rent your property?
• What are the local health and safety and legislative requirements for letting property?
• How easy is it to evict tenants?
• What are the squatting laws in your chosen country?

• Legal risk
• Is your lawyer independent?
• Does your contract favour the developer?
• Is your contract fully assignable?
• What protection do you have as a foreign investor?
• What historically has happened with regard to legislation concerning foreign investors, property rights, title deeds and enforced nationalisation of private property?
• What title guarantees are there?
• How robust is the law relating to property ownership?

• Financial risk
• What if you cannot get a mortgage on completion?
• If you can’t, how much money will you lose? What does the contract commit you to?
• Can you make your monthly payments with ease?
• What about currency risk?
• In what currency should you have your mortgage?
• In what currency should your rental income be advertised?
• Can you cover voids and for how long?
• What if interest rates rise; can you still cover your operating costs?
• What is your break-even point if interest rates rise (i.e. at what rate does your revenue match your costs)?
• What will happen to your income after the rental guarantee expires? Will you get the same net yield renting independently?
• Have you got the best mortgage product available?
• Are there any hidden costs that you have not accounted for?
• What is the tax situation in your chosen jet-to-let country?
• Does it have a double-taxation treaty with the UK or will you effectively pay tax twice?
• Is there a Wealth Tax and will you have to pay it?
• What if you lose your job?

• Environmental risk
• What if there is a natural disaster? Do you have all your eggs in one basket?
• Has your property been built on contaminated land?
• What other buildings are being built near your property and what is their purpose?

• Geographical risk
• Is your property in an earthquake zone?
• Is your property in a hurricane zone?
• Is your property in an area prone to flooding?
• Is your property underneath a pylon line or is there a mobile telephone mast nearby?
• Will a motorway be built in front of your property?

• Management risk
• Do you trust the management and lettings companies?
• Will they find suitable tenants for your property?
• Will they ensure that the property is well maintained?
• Will they be competent with regard to current legislation?
• If you have a holiday let, can you be sure that when they say the property is empty, that it truly is and is not being sub-let without your knowledge?

• Corruption risk
• Has your property been built illegally due to corruption in the local planning office or mayor’s office? What are the consequences?
• Will you be asked for money at any stage as a ‘backhander’?

• Tastes and fashions
• What will happen when the next cheap hotspot arrives on the scene?
• What happens if your location becomes unfashionable?

Ask the questions

Often jet-to-let investors overlook some of the most basic due diligence questions in their rush to secure the deal. You must make a thorough analysis of the risks as well as remembering the potential rewards before you sign any paperwork or part with any money.

This article is designed to arm you with the relevant questions to ask both yourself and the agent or developer. Its aim is to make you stop and think before you leap into the unknown. Those investors who get the answers to all of their questions before they buy are generally successful. This is the purpose here, to assist you in becoming a successful overseas property investor by highlighting some of the issues which may deflect you from that goal.

Firstly, you have to understand that there are risks you can do something about and others that you cannot. It’s difficult to hedge for international events such as war or bird flu.
A useful management tool is my risk management matrix, which is a straightforward way of making your risk strategy concrete. A few risk factors and examples are listed below to get you started.

More pages

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Page 2: Risk management matrix

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