Risk is an unavoidable part of investing, no matter where you are putting your money. Some investments have greater risk than others, but ultimately, no investment is guaranteed to yield returns. Savvy investors know that balancing investment risk is an essential aspect of any good investment strategy. Part of ensuring you have a balanced portfolio is conducting a thorough risk assessment before investing, in order to understand the potential pitfalls involved.

Property market value has historically increased over time, leading to property being seen as one of the less risky investments. However, it is still crucial to do your due diligence so that you are appropriately managing investment risk for your portfolio.

Loan-to-Value Ratio

When it comes to risk management, investing in opportunities with good loan-to-value ratios (LVR) is crucial. LVR measures the ratio between the loan amount and the value of the property, represented as a percentage. For example, if a borrower would need $600,000 for a property valued to be worth $800,000, the LVR would be 75% (75% of 800,000 is 600,000). The lower the LVR, the less risk there is to investors, as the borrower has more equity in the property from the start.

At Arthurmac, LVR is a crucial factor in our investment risk analysis process, but it is not the only aspect considered. Generally, Arthurmac aims for 65% LVR for first mortgages and 75% for second mortgages. However, factors such as the quality of the asset and the trustworthiness of the borrower may adjust this accepted percentage. 

When considering LVR, the most important aspect is whether the valuation was completed by a trusted valuer with a proven history of accuracy. Unreliable valuers can result in an inaccurate LVR, potentially costing investors significant amounts of money. Arthurmac only uses reliable, trustworthy valuers from a select panel when assessing property for private mortgage funds, ensuring LVR is accurately calculated and that all investment risks are adequately assessed.

Quality of Assets

When it comes to private mortgage investment opportunities, the quality of an asset should be the next aspect considered after LVR. Factors impacting asset quality include its location, whether the property is only land or has been built on, the condition of the dwelling, whether the property is occupied and the type of asset, such as residential or commercial.

While these factors will be considered during a valuation for determining LVR, it is important for the lender or broker to do their own investment risk assessment before a private mortgage investment is made. For investors seeking an optimal portfolio, it is always wisest to choose properties where you have a strong understanding of the risks involved. 

Who is the Borrower?

In addition to LVR and assessing the asset, it is also important to consider who the borrower is before investing in private mortgage debt. At Arthurmac, a thorough assessment is made of each borrower, considering credit history, income, assets and their experience managing similar properties. 

On top of this, Arthurmac also closely analyses a potential borrower’s exit strategy to get a strong understanding of how they intend to pay back the loan. Borrowers who have put the property on the market or sold it can be seen as lower risk, as they have already demonstrated their intention to repay the loan. 

Assessing Risk at Arthurmac

Arthurmac’s thorough risk assessment process is one of the reasons we have been able to provide our investors with steady returns for over twenty years, even through times of financial turbulence such as the GFC and the global pandemic.

With a trusted, proven team of investment and compliance experts, investors are able to make the best decisions for their portfolios with confidence. Arthurmac’s commitment to transparency means our investors receive a comprehensive memorandum detailing the strengths and weaknesses of the investment, as well as a complete breakdown of fees, before the investment is finalised. 

If you are looking to strengthen your portfolio by investing in private mortgage debt, reach out to the Arthurmac team on 1300125556 or complete our online contact form today.

Disclaimer: Please be advised that it is highly recommended to conduct thorough research and seek guidance from a financial expert prior to making any investment decisions. It is further recommended to regularly review your investment portfolio and make necessary adjustments to ensure it aligns with your financial goals.