Real Estate Investor Magazine South Africa March 2015 | Page 34

STRATEGIES

Risk
management
in buy-to-let

Understanding the value of risk
BY KOOS DU TOIT

A

ll investments entail risk, but some investments
are inherently lower risk than others. For
example, investors in traditional asset classes
not only have to accept higher risk to obtain higher
returns, they have absolutely no control over the
significant risks their investments are subject to,
including extreme market volatility and fickle investor
sentiment.
What places buy-to-let property investment in a
league of its own is not only the investor’s ability to
manage – if not eliminate – all the risks associated
with a direct investment in property, but also the fact
that reducing the risk does not reduce the rewards, but
increases the returns.
What exactly is risk management and how can
investors in buy-to-let property manage – and even
eliminate – the risks they face?

“Reducing the risk does not
reduce the rewards, but increases
the returns.”
Risk management is defined as: “the identification,
assessment and prioritisation of the risks faced, followed
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March 2015 SA Real Estate Investor

by the co-ordinated and economical application
of resources to minimise, monitor and control the
probability and/or impact of such events.” This sounds
complex, but in plain English, risk management is
simply taking proactive steps to prevent or reduce the
impact of possible losses.
Despite the jargon and apparent complexity, risk
management can be summarised into a simple fourstep process, which requires some common sense to
implement.
1) Identify all potential exposures or risks
This step is quite simple to complete in the context
of property investment, as the risks it entails have
been well-documented. Some of the most common
risks in property investment include vacancy, damage
to the property, non-payment of rental, interest rate
hikes and buying the wrong property or paying too
much for a property.
2) Evaluate and prioritise all potential exposures
or risks
Once the risks have been identified, they are evaluated
in terms of their likelihood and consequences. Then,
they are prioritised to ensure the risks with the
greatest potential loss and the greatest probability of
occurring are addressed first.
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