What is your risk tolerance?
Does investing in property take you outside of your comfort zone?
Most people understand the concept of living within your comfort zone. When the events in your life are within your comfort zone you feel relaxed and calm. When events occur that take you outside of that comfort zone, that’s when you start to feel pressured and anxious.
And whilst a little pressure is ok, even beneficial, too much will create panic.
How you buy and manage your investment property, which tenants you choose and how high your mortgage repayments are, will have a direct effect on your peace of mind. The higher the risk, the higher your tolerance of risk needs to be. Too much risk and you will become anxious and uncomfortable.
By knowing your position on risk, you can use strategies that will help keep you in the comfort zone. It’s also important to know the risk tolerance of others particularly in the following situations.
When buying an investment property with other people, the risk profile of the partners involved may vary greatly potentially increasing the chances of conflict. If one partner can tolerate a higher risk level they will want to pursue a more aggressive investment strategy, which will make the other partner with a lower tolerance apprehensive and anxious. This dynamic is often the cause of friction between couples where one partner’s ideas are considered reckless and the other partner is accused of stalling. This situation can also occur with other family members and well-meaning business partners.
When seeking financial or property advice make sure the person giving the advice is sensitive to your level of tolerance. If your risk tolerance is low, trying to follow the advice from someone that has a high risk tolerance will result in many sleepless nights. When fear and panic creep in, it will be difficult to keep making the appropriate decisions to maintain a high risk strategy. Alternatively receiving tame advice when you are looking for fast growth will leave you underwhelmed and disappointed.
Some feelings of nervousness are natural when investing your money, but if you feel overwhelmed on a continual basis you may need to look at your strategy and/or seek advice from a property professional that can help minimise the risks. Many times it’s the accumulation of many small risky decisions that add up to one huge headache. Stepping back occasionally can help clarify which areas are making you feel uneasy.
So, how do you feel about your investments? Are you comfortable?
Thinking of investing? See our previous blog “Mortgage Brokers- What Do They Offer the Property Investor”
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