How will various economic, political, social and technological forces drive or challenge asset selection decisions in 2022? As this is the start of the year, it is common to think at a higher level. That said, do not confuse a meditative exercise with a sudden belief you can predict the future. The last two or three years proved to most people that forecasting is a fool’s errand. Who predicted the pandemic? When many thought we had conquered COVID, along came Omicron. Looking at the UK housing market, do you remember the reports indicating a house price crash and other dramatic market changes before and after the stamp duty ‘holiday’?
Planning for possible futures is wise but predicting the future is doomed to fail. Even if the future is exactly like the present, risks exist when investing. Macro risks (demographic changes over long cycles) and micro risks (fire or damage from a storm). Your job as a real estate investor is to manage the risks so you can remain in the game and collect the rewards. Playing the long game neutralises many risks associated with real estate investing.
Managing Risk - Four Methods
There are four-axis to think about when evaluating risk. Identification and being aware that something is a risk is first. Next, how can the risk and the associated harm be avoided? When it is impossible to prevent problems, the focus has to be on containment (mitigation). Finally, risks that cannot be identified, avoided, or mitigated should be sold on to a counter-party specialising in the niche.
If you cannot spot the risk before it bites you, are you investing or gambling? Identification is never perfect and experience and prior training go a long way towards reducing specific risks. Very little is new when it comes to property investing - this is not rocket science where you need an advanced degree in maths or physics. For most investors, understanding how a house works is the core skill. If you are new, you can learn what you need to know.