PB-184 How to Eliminate Unnecessary Risk - Property Inc

[ Podcast Transcription ]

I’m Peter Boyle McNess and he is Chris Lane and welcome to another of these regular property briefings.

And a warm welcome to you Chris. Well once again it’s good to be here. As I listened back over previous episodes, I noticed the focus has been on how to be successful with commercial property investing. However, following several queries, I thought it might be useful if we took a look at some of the potential risks and how to go about eliminating them.

So where’s the best place to begin? You need to understand everything you do in life involves some risk, whether it’s buying commercial or residential property, shares, or even just living. There’s always some element of risk involved. However, it’s not a matter of eliminating all risks, it’s simply a matter of eliminating what’s known as unnecessary risk.

And you need to know how to manage what I call intelligent risk, where you gauge Quantify and control what the risk is and then build that into your calculations and your method of acquiring property so that you have a clear understanding of the risk you’re prepared to take on. If you don’t want to incur any risk at all, well, the best thing is to simply put your money in the bank.

And then of course you lose out on any capital growth. You simply receive interest, which nowadays is pretty minimal. Plus, you’re also running the risk that the value of your money will dissipate over time. Clearly it’s a balancing act, where you need to distinguish between intelligent risk An unnecessary or stupid risk.

Having made that distinction, what are the key steps involved? Well, this is where things can become a little confusing. It’s rather like the chicken and the egg dilemma people have. They feel they cannot become good at commercial property investing unless they do lots of deals. But then, how do you hope to do lots of deals until you know more about commercial property?

Therefore, your three key steps are sourcing properties to start with, you actively looking out for potential opportunities so that you can start to build up your confidence, and after a while you’ll find that’ll begin to happen as you build your knowledge base. Secondly, you need to be making numerous offers on properties.

Now, understand that you’re not committed until you sign a contract, therefore you need to be making lots of offers on a regular basis. And you’ll find that your success rate will probably start out being something like ten to one. And I don’t mean repeated offers on the same property. Then it’s a matter of improving your hit rate.

Initially, it might take quite a few properties before you actually uncover something you feel is worth pursuing. Currently, my hit rate is probably around two to one. In other words, the properties I quickly shortlist, I tend to conclude a deal every And it’s by taking these three steps that you will quickly start learning the ropes.

And because there is no commitment until you’ve signed a contract, this should begin helping you build your confidence and also helping you to identify what risks are reasonable. And in the process, you’ll start to eliminate, or at least avoid, Those risks which are unnecessary. Let’s perhaps explore these steps in a little more detail.

I guess for most listeners, they’re not yet full time investors, and therefore looking at lots of deals can become rather time consuming. Even before you get to do any financial analysis, and that’s mainly because you get bogged down in a whole host of information provided by selling agents. Now, you may recall that I provided you earlier with a list of.

Eight investment objectives and 12 buying criteria that need to be satisfied before a property even gets on the shortlist. And that’s before you start making any offers or doing any further analysis. But if you try to do that manually, it becomes very time consuming. And so that’s why I put together the high return filter app to enable you to decide in probably three or four minutes whether a property makes it onto your shortlist.

Now that you have a short list, let’s move to the second step. The reason I suggest you make lots of offers on properties. Is, because you need the experience, and if you’re doing this on a regular basis, agents start to know you’re in the market and will begin sending you deals. The important thing is, whether or not it’s a deal that you’re going to run with, you must always thank the agent who sent it to you.

Ideally send a card or at least a short email thanking them and also reconfirming your buying criteria and letting them know that you’re looking forward to further. opportunities. Anyway, when it comes to making formal offers, I always use a purchase proposal template. Yes, it’s personally written and formatted to easily insert the specific information relating to the particular property.

And you find being included as part of the negotiating master class training that I make available to clients. And the third step? Sometimes the vendor’s response might surprise you, especially when you initially think you’re a fair way apart. However, it may be that the vendor simply hasn’t had any offers over the past month and a selling agent may have.

I’ve been given instructions to quote a high asking price and even though you may put in a low ball offer, the vendor may come back to you with an encouraging response and there may be nothing wrong with the property, but he or she has come to realize that they might have been off with the fairies as far as their initial.

Price was concerned and they may also be getting a little desperate because their loans falling due And it’s going to cost them serious money to get another valuation and extend the facility So you’d be surprised how there may be Ways in which the circumstances can change and by you putting forward a proposal you quickly learn how to read the feedback

So, what other aspects should you be considering? Well, you might find that the financials for the property look rather good. But in actual fact, the maintenance has been deferred. As such, there are things which have been put off, and you will start to incur significant expenses as the new owner, simply because the vendor has been milking the property and not attending to the maintenance issues.

It may be that the property is a good property, but it’s just wrongly located for that type of use. And if the property has been on the market for a while, it’s not necessarily a bad thing. It could simply be that it’s been incorrectly priced. However, it might be that the other potential buyers have found some impediment, rather than just the fact that it is overpriced.

How important is timing in all of this? Well, it’s vital, and you also need to know where you are in the local economic cycle. Plus, you need to know whether there are any new projects being built or could be built in the nearby area. In other words, how might they affect supply? And as you’ll appreciate, much of this is common sense, just like checking whether there are.

Any changes in the zoning that are about to occur that will ultimately affect your property. Perhaps you might just recap on what we’ve covered. Okay, well, when it comes to commercial property, your risks can be grouped as follows. You have a practical risk which relates to your own poor decision making.

And this could involve the quality of your initial analysis, negotiating the deal, and setting up the ongoing management. Ultimately, it all comes down to experience, and that’s where your consulting team can certainly help you out and minimize your risk. Then you have things like financial risk, which relates to the funds you borrow on the property.

Are you over leveraged? Do you have too great an exposure. And generally I suggest keeping some funds aside to cover at least two or three months worth of interest payments just in case the rent doesn’t come in for whatever reason. And the final category involves what you might call insurable risk. And this is making sure that you have the correct physical protection for your property in the case of anything going wrong.

And here I’m talking about natural disasters like fire, flood, and other forms of property damage. Thanks for doing that. Look, if you’re able to manage your risks by following what we’ve covered here, you’ll then be well on your way to becoming a successful commercial property investor. Well, that’s good to know, and thanks again for all your advice.

And again, it’s my pleasure.