There are no tricks to property investment!
Beware of those who make sweeping statements, offer guarantees, use pressure tactics, don’t acknowledge the risk, and avoid questions or concerns.
There are no rabbits to be pulled out of hats!
But it’s not rocket science either!
As with any purchase, the onus is on the buyer to be aware.
The best way to be aware is to be educated and know the right questions to ask.
Understand that there are no guarantees. A qualified, honest property professional will make evidence-based recommendations that meet your needs (not theirs)
Understand that ‘life is what happens while making other plans’ and so your circumstances may change over time.
It is therefore important not to over-commit and to invest sustainably for the long term and to ‘stress test’ your cash flow figures.
Go into it with your eyes open:
If this past month has taught us anything, it’s that good times can turn bad quickly.
Resilience planning for economic downturns
In December almost every property commentator was salivating at the thought of markets on the rise. After price retractions in Sydney and Melbourne, the turnaround was beginning to gain momentum. Markets such as Brisbane were seeing long years of dormant performance coming to an end with early February 2020 indicating a bumper year was in store for the Sunshine State’s capital.
Cue forward four weeks and who could have imagined the picture before us with the COVID-19 pandemic. Millions unemployed, tenants provided a moratorium on evictions and banks offering a freeze on repayments.
Of course, the full force of the economic tsunami is yet to be seen, because the property market’s strength is directly linked to confidence. If convincing solutions to the crisis can be found quickly, then the market will return in force. Prolong the pain and the recovery will likewise be extended.
But of course, the big lesson for everyone from political leaders to entry-level workers is simple – planning pays. Here what we can all learn as property investors from the Coronavirus (COVID-19) crisis about surviving the ups and downs.
Know your path
Advisors in our network follow a 14-step process to help clients build a portfolio… and the first eleven of those step having nothing to do with property selection. So when it comes to beginning an investment journey, don’t get caught up in researching real estate straight off the bat. Instead, carefully plan your path.
Recognise your starting point and defining your goals.
Write down your current asset base and income and work out what you want them to look like eventually. Think about how long you want to take to get there and layout your prospects for future income growth. Also, consider what life events may be before you. Are there kids in your future? Is a move interstate or overseas for professional advancement likely? You won’t know all the answers with 100 per cent certainty, but most people can sketch out a reasonable idea of how they’ll get from beginning to retirement and the types of considerations that need to be added to the mix. By setting out your path, you have a reasonable plan to follow to reach your endpoint.
Assess your risk tolerance (Stress Test)
This is important because long-term investors must be able to deal with market ups and downs. It’s essential to understand how you relate to risk so you can select the right composition of property types for your portfolio. For example, you may be an average wage earner with a family that needs the surety of shelter, education and other essentials. As such, you might seek assets that compromise a little on value growth potential but provide a stronger cash flow position. Conversely, you might be a young professional on good income who can invest a bit more and bear the cost of having to tip in a little extra each month to support your investment, knowing that it has great potential for value growth. Understanding your risk tolerance means you can travel with confidence and avoid panic if the market takes a hit.
Understand your finances
It is essential to have a handle on your finances. This includes home budgets, asset balance sheets and your borrowing and loan servicing capacities. This is where an experienced mortgage broker and property investment advisor are essential. Your investment advisor can help guide you through the key numbers to make sure everything is up to date. Great advisors also implement a regular audit of your figures to ensure they’re always current. Mortgage brokers will help you seek the best loan terms and give plenty of advice on what to do to improve your chances of gaining approval. This could be for a new purchase, or when refinancing under changed circumstances.
Buffers are essential
Perhaps more than anything else, those who are most successful at riding out the market rollercoaster are investors who have buffers in place. Make sure you are not overextended continuously in your loan capacity. Similarly, ensure you can comfortably meet loan repayments and other portfolio operating costs. Finally, work toward having a pool of available cash you can draw on in emergencies. This usually is best kept in an offset account to help reduce your interest bill as much as possible. This buffer – which should cover at least three months’ worth of outgoings – means you can hunker down and ride out most unexpected hits. This buys you the one thing that we all need in a crisis – time. The buffer lets you make plans without fear and can help deliver you to another side, a downturn intact.
While maintaining personal and physical safety during these events is your primary goal, the importance of planning for financial hits can’t be ignored.
Applying the principals outlined above will help you ride out the storm.
Author: Richard Crabb | MD ASPIRE Network | PIPA Board Member