How smart investors approach risk in property: Why getting it wrong can cost you big
From bad structures to underinsurance and blind spots within your advisory team, veteran accountant Munzurul Khan and Phil Tarrant reveal why risk management is the overlooked backbone of a successful property portfolio, and how investors can get it right from day one.
Understanding and mitigating risk is one of the most critical, yet often neglected, aspects of property investment, according to Phil Tarrant and Munzurul Khan, director of KHI Partners, in the latest episode of In the Balance.
Risks can arise from a broad range of sources, the pair argue, including overconfidence after a few successful deals, misguided buyer’s agents, or using structures such as trusts at the wrong time.
“Risk is connected with every single asset class,” said Tarrant. “Whether it’s buyer’s agents following the herd or investors overestimating their track record, there’s always risk. And that’s the art of being a good accountant, knowing how to weigh those risks and guide the best path forward.”
Khan, whose accounting firm advises a wide spectrum of property investors and business owners, said many mistakes stem from an investor’s failure to properly define risk.
“Any risk can be mitigated as long as, number one, we understand the risk completely … What is the risk? How does that apply? What are the pros and cons? And to almost look through your worst-case scenario, but at the same time still have a sense of practicality and pragmatism.”
Answering these questions, he said, helps investors understand their personal risk profiles – what Khan calls the “sleep at night factor”.
This factor underpins decisions across all elements of a portfolio, from structuring and finance through to diversification and insurance.
He added that investors often fall into two camps: those who get overconfident after a few good results, and those who become “armchair investors” paralysed by fear. “So the question is, how do we balance in between both?”
“At times I sort of see some of the investors … [say], the last two years I’ve invested in this area and it has done really well. So that means anything which I touch, it becomes a bit of gold. But does it [hold] over a period of time?” Khan warned.
While property remains a cornerstone asset for many Australians, he cautioned that concentrating exposure in one location, structure or asset class can amplify risk.
Diversification across asset types, geographies, and even internationally can provide a buffer against market volatility.
You can listen to the podcast here.