Risk Mitigation

It pays to be careful.

 

1.The ACQUISITIONS RISK refers to the risk of buying the ‘right property’.

The factors to include are the health of the economy generally and the phase of the property cycle for a particular area.

Demographics – include baseline population figures and forecast growth, typical family compositions. Identifying matching property types and above-average household incomes and employment rates all contribute positively to the balance of evidence to support a choice.

Vacancy rates and the demand for accommodation, the supply of property now and planned as well as local infrastructure, should also be examined.

Due diligence, with the assistance of expert advice, makes it more likely to hone in on ‘above average opportunities’ in the market.

2. FINANCIAL RISK is contingent on your ability to sustain the investment for the long term.

Remember that property is not a ‘get rich quick scheme’, time is more important than split-second timing!

Any decision you make must be sustainable for the long term, and so the bottom line out of pocket costs should be kept within a range that doesn’t become a stressful or unmanageable burden. It’s important not to ‘bite off more than you can chew’!

We have talked before about having a team of experts and qualified, professional tax advice is essential. Tax should not and can not legally be avoided in Australia, but it can be minimised! Having sound advice about ownership splits and structures will allow you to reduce your tax burden and maximise your rebates, both contributing to sustainability.

The availability of credit will also vary from time to time depending on prudential regulation, monetary policy, national savings levels, consumer’s propensity to consume and more.

Particularly when purchasing a property off-plan, with a delay between commitment and settlement, lending criteria can change. Again this reinforces the advice that building in a contingency for the unforeseen is wise and not committing right to the limit of your borrowing capacity.

Ensuring the property against damage or loss of rent is crucial and is an allowable, deductible cost of ownership.

 

3. MANAGEMENT RISK is concerned with will my asset be looked after? 

Australia is a vast country, and as we have also seen, there is no one property market. There are opportunities across this big country, far and wide.

The correct investor mindset makes the decision based on the balance of evidence, and therefore, the target area may be outside your immediate reach. As an investor, as your portfolio grows, you can’t be ‘looking over the back fence’. Most of us are too time-poor, specialising in our own jobs and areas of expertise to be self-managing a property portfolio. Sourcing, vetting and managing the tenant is a specialist Property Manager’s role.

Finding a tried and proven Property Manager, based on recommendation and experience is a priority. Keeping tenants and minimising turnover and having them care for your property is also encouraged by being a fair and responsive landlord. Tenants have a right to expect that the property they are paying for is in good order, and everything is working as it should. Prompt attention to any repairs/ requests usually pays dividends in terms of keeping quality tenants.

Of course, it’s not unheard of to suffer damage or rent arrears or default, and so Landlord Protection, building and contents insurance are strongly advised.

 

4. Exit Risk can be mitigated through expert advice about timing and carefully researched, property selection from the start.

 

Some investors have no intention of cashing in their investments and instead choose to live off the proceeds rather than the capital

itself. This may be the case if they have built up a sufficiently large portfolio to support themselves and may wish to bequeath their assets to their children or others.

If the intention and decision to exit is made, it may be a partial divestment (one property at a time, or a portion of their assets) or it may be all at once. As there is no one property market, some in growth phases and others not, it is more likely and sensible that a diversified portfolio is sold off at the right point in the property cycle for each property. If proper due diligence has been conducted initially, appropriate properties that maximise market share will have been chosen, and so the market on the resale is also optimised.

When it comes to Capital Gains Tax payable, a qualified and experienced accountant can advise you on how to reduce your obligation. CGT is charged at your top marginal rate and so timing the sale of property in a financial year in which your earnings are lower may be advisable.

 

Some risks are identifiable and readily accounted for and insured: Others are less predictable, such as exogenous shocks that impact the economy, like COVID-19 or strained diplomatic relations with a major trading partner impacting our GDP through fewer export sales. Legislative changes to government policy can limit the incentives and support available to property investors. While the apparent can and should be identified and the investor should adequately protect themselves, the importance of good education cannot be understated as a means of preparing for and understanding the consequences of  ‘black swan’ events such as the pandemic we are currently finding our way through.

Clearly understanding the critical role of housing investment in the economy via the multiplier effect on jobs and production and ultimately welfare, should provide confidence that macroeconomic management (as well as micro or structural changes) is the constant concern and responsibility of government and that a ‘floor’ under housing prices is as important to Australia as it is to individual investors. Having an informed and calm, assured investor mindset and approach to both the business and the property cycles and their trend line allows the investor to survive the troughs and be poised to enjoy the inevitable peaks.

The provision of expert advice and assistance in the process makes it far more likely that the property(s) will be chosen to help minimise risk – those with a predominance of recession-proof employment options, strong yields for sustainability, tight vacancy rates in diverse economies, priced well within the investors comfort range and ongoing cash flow capacity, and appropriate property configurations and styles to align with current and future demographic trends and appeal on exit.

 

 

 

 

 

Investor Mindset

“Life rewards action, not inaction.”

 

Be careful what you wish for! The media is full of stories about people who have won money in the lottery and have not only lost it all but ended up in a more unfortunate situation than they were in before the windfall. Without the right mindset, it can be a house of cards!

 

 

 

https://www.news.com.au/lifestyle/real-life/the-lotto-curse

 

 

 

What these people were missing was education and obviously any ability to postpone gratification!

Told you it was necessary!

A sensible decision would be to eliminate any debt and satisfy some basic needs – perhaps the car needs replacing or a home? But none of these so-called  ‘winners’ seems to have any inkling that they could invest the winnings and live off the interest or rent earned and retain their capital.

What they lack is the investor mindset – immediate gratification is driving them, not financial discipline or long term goals. They could make the winnings work for them for a long, long time with just a little restraint and planning.

Opportunity doesn’t necessarily equal success, but it can.

According to Steven Covey, author of The 7 Habits of Effective People, the number one habit is Be Proactive – make decisions to improve your life through the things you can change.
Abundance isn’t finite, there are opportunities for ordinary Australians to create wealth, but you need to know about them and be prepared to act on them!

It comes down to knowledge and attitude.

That attitude is an INVESTOR MINDSET

1. The decisions you make need to be of the head and not the heart!  They need to be made after due diligence and based on the balance of evidence.

2. When it comes to property investing, too many focus on their ‘own backyard’.

Australia is a big place, and as we will see later, there is no one property market as such. There are a collection of markets, some growing, some stalling, and even within those, and there is varying demand for different types of property.

These variations are a result of the fact that supply and demand for housing is a function of a wide variety of economic and demographic drivers that can vary from one state to another, one town to another and one house type to another. The best location and type of property is the one that stacks up dispassionately, based on the figures that suit your circumstances and goals.

3. You don’t need to be looking over the back fence either. Expert property management is crucial, particularly as your portfolio grows. Managing the property is the property manager’s job, you do your job, and they do theirs. Property management fees are tax-deductible – just another cost of ownership.

4. Similarly, the investor should not be overly concerned with the design and decor of an investment property. Too many people imagine themselves living in the property. While it’s essential to have plans that meet demographic changes, investment product is built with the tenant in mind. What appeals to the tenant market is what counts and also what maximises the market on resale.

The same goes for the inclusions in a property. Is it worth spending thousands on upgrading a property’s interior for rental? Some things are commonplace and expected, such as air conditioning, window coverings and hard floors in high traffic areas, etc.. But any quality offering will include those things – complete turnkey means that the tenant just needs to move in with their furniture and start living – the investment is basically  ‘remote control’.

Going beyond that is something that can be done as part of an exit strategy, many years down the track if necessary. Don’t pay extra interest on an upgraded inclusions list for twenty years, instead, spend the dollars when it’s needed.

5. The property is an investment vehicle – an opportunity to generate income, build wealth for the future and reduce your tax burden now.

6. Time in the market is more important than timing. Some people wait so long for the right time that they never make a decision – suffering ‘paralysis by analysis’. No activity in life is risk-free or opportunity cost-free, but it is a matter of prioritising your goals and then making a plan to achieve them and sticking to it.

7. Understand that psychology plays a significant part in most people’s decision making. The ‘herd mentality’ (FOMO) can lead investors to come in and out of the market because that’s what others are doing. Instinct is what makes us run at the sight of a lion; it’s logic that should override impulse and make investment decisions.

“Be fearful when others are greedy.
Be greedy when others are fearful.” Warren Buffett

8. The media too is responsible for a great deal of fear and confusion. Bad news sells, drama sells. Investors need to ignore the doomsayers; they come and go. Lack of consumer confidence, fueled by the media, the crowd and sometimes their own family and friends (often those who have ever invested in anything) can often bring to fruition what the fear peddlers predict.

9. Successful investors gather a talent bank of support around them – Investment Property Advisor, Accountant, Broker, Financial Planner, Insurance Broker, Property Manager – all experts, trained and qualified in their specialty.

10. Understand that market corrections are inevitable – panic is not an option, nor is it a strategy! Business cycles are to be expected. Sometimes they are a result of macroeconomic policy by the policymakers via Fiscal Policy (the Budget) or Monetary Policy (interest rate manipulation by RBA), or even exogenous factors, outside of our control, such as a decline in commodity prices paid by our Asian trading partners or the current pandemic.

Property markets go through cycles and periods of correction too. Rapid appreciation in prices is often followed by a tightening of credit conditions and a softening in demand. It is essential to be prepared for these and to stay the course. Remember, it is the trend that is important.

11. Patience is a virtue! Property is not a get rich quick scheme.

12. Most importantly, Investors have the mindset that life rewards action, not inaction.