Investing in financial markets always carries an inherent level of risk. However, the degree of risk an investor is willing to tolerate varies widely among individuals. This tolerance for risk is often referred to as a ‘risk appetite’. It plays a crucial role in shaping investment decisions and strategies, including whether or not to purchase an SDA investment property.
Below, we discuss the factors that impact your risk appetite so that you can get the wheels in motion to determine if investing in SDA properties suits your risk profile.
Understanding your risk tolerance
Financial risk appetite is the level of risk an investor is willing to assume to achieve their investment objectives. It reflects an individual’s comfort level with uncertainty and potential losses in pursuit of potential gains. Risk appetite is a highly subjective and personal trait influenced by factors such as an investor’s financial goals, time horizon, wealth, knowledge, and psychological makeup.
Your risk profile will land somewhere between an ultra-conservative investor, who isn’t prepared to accept any investment risk, to a more ‘aggressive’ investor, who can more comfortably accept risks.
Factors influencing your risk appetite
Investors with higher financial literacy and experience tend to understand risk better and are often more comfortable taking calculated risks. Conversely, those lacking knowledge and experience may have a lower risk appetite. However, it’s not only our experiences and education that shape our risk tolerance; our goals, investment time frame and level of wealth can also influence our resultant risk profile.
For example, someone with a longer investment horizon may be more willing to tolerate short-term volatility in pursuit of higher returns. Essentially, a longer investment time frame provides more time to ‘ride out’ market lows and recover from any potential losses in the value of their investment or portfolio. Similarly, investors with substantial financial resources may be more willing to assume higher risks.
How to determine your risk profile
While you may have a general idea of your appetite for risk with investing, a qualified financial adviser is usually best positioned to determine your risk profile. Financial advisers use their professional judgement and the results of a risk profile questionnaire to help assess your appetite for risk. This process is commonly known as a ‘risk assessment’.
Is property investment high or low risk?
Property is typically considered a longer-term asset to invest in, as most investors do not intend to sell their property within one year of purchasing. As an asset class, though, the Australian Investor’s Association (AIA) lists property as a growth asset, meaning that most investors are striving for both income and capital appreciation. The AIA also sets property as a moderate/high-risk asset with moderate/high expected returns.
Some of the other characteristics of property investment include:
Property investment can provide diversification benefits to an investor’s portfolio. Investors can potentially reduce their overall portfolio risk by including real estate alongside other traditional assets like stocks and bonds, cash and fixed-interest assets. However, before you adopt any risk management strategy, it’s essential to consult a licensed financial adviser.
Stability and Income Generation
Real estate, particularly income-generating properties such as rental properties or commercial buildings, can offer stability and a consistent cash flow stream. The relatively predictable income generated from property investments can contribute to a more conservative risk appetite.
Illiquidity and market volatility
Property investments often have higher liquidity constraints compared to other asset classes. The inability to quickly convert property assets into cash can impact an investor’s risk appetite, especially if they require access to funds in the short term. Moreover, property markets can also be subject to volatility, affecting an investor’s perception of risk.
The benefits of NDIS investment properties
No investment is ever truly ‘risk-free’, however, by conducting your due diligence through weighing up both the risks and benefits of any financial decision (as well as accessing personal advice), you can help to ensure that your investments remain in line with your risk tolerance and strategic objectives.
The benefits of an NDIS property include:
- Income yield is supported by SDA funding, meaning that you have the opportunity to access rental income that is potentially higher than traditional rental properties.
- Longevity of support under the National Disability Insurance Scheme (NDIS). The strong demand for suitable accommodation that is specifically designed for individuals with disability is not going to dissipate in years to come — NDIS tenants find their forever homes in Specialist Disability Accommodation!
- SDA housing is not without capital appreciation. Just as traditional properties generally rise in value over time, this opportunity exists for NDIS homes, also.
- Making an enormous social impact. Benevolent investing and ethical investing has grown in popularity in recent years. Historically, few benevolent or ethical investment options exist in the property sector. An SDA home allows an investor to provide a life-long home for a person with extreme functional impairment or high support needs who would otherwise be living in unsuitable accommodation or be sent to an aged-care facility.
How to purchase an investment property in NDIS housing
Due to being offered under the NDIS, Specialist Disability Accommodation investment comes with additional steps to any other investment property. Therefore, working with professionals in the NDIS investment industry is important.
At Apollo Investment, we have a panel of industry experts who can help you every step of the way to find your property investment sweet spot through an SDA investment property. Reach out to us today!