As the world watches the European debt crisis continue to unfold with nervous anticipation, investors would do well to remember that old boy scout motto – be prepared.
And I would add – for anything!
While Australia’s financial position is still relatively stable in comparison with much of the developed world, there are some concerns closer to home with regard to the ability of local banks to meet the rising cost of funding from offshore lenders.
And although the Reserve Bank has been generous this Christmas with two interest rate cuts in a row, some economists are suggesting that the banks will struggle to pass on any further cuts as they pay more for their money.
Additionally, we could see lenders tighten their purse strings in response to continuing financial instability, both overseas and closer to home; meaning lending criteria may tighten in the New Year.
Property investors should prepare
So what does it all mean for property investors and how can you prepare for the worst, while still hoping optimistically for the best?
The most important piece of advice I would give anyone coming to me about property finance right now is to get all your ducks in a row and make sure you have a healthy cash reserve – a rainy day fund if you like.
If you are currently in a position where you have a nice little pool of equity built up in your property portfolio, then you are already ahead of the game.
Best of all, if you approach your financial management in the same boring but effective manner as you do your investing – that is with a steady, long term focus rather than high risk speculation – you can sleep easy knowing that you will indeed, be prepared.
When a Line of Credit counts
Now is the time to think about establishing a Line Of Credit (LOC) using your existing equity. In fact I would go so far as to suggest that you should draw as much equity as your bank will allow and stash all of it away as a cashflow buffer.
This advice comes with one proviso however; there is no point drawing on your equity and then pouring all of that spare cash into some extravagant investment vehicle such as foreign exchange trading. Or worse yet, a Summer holiday!
Your LOC should be viewed purely as a buffer that will give you consistent financial stability, regardless of the ups and downs of world markets and local bank funding dilemmas.
Now is the time to take action because as the challenges in Europe continue, there is no doubt that the banks will start to pull in the purse strings in response to the inevitable jump in their cost of offshore credit.
Build a buffer or buy a bargain
The other beauty of being financially prepared is that when everyone else puts the brakes on and competition in the housing markets dries up, you can still be in a position to nab the bargain priced opportunities that abound; by using some of your LOC as a deposit on your next property investment.
But you should only consider this option if you have a very healthy cashflow buffer; one that you could afford to “borrow” from for a deposit while still maintaining a nice little rainy day fund that you can call on if things go pear shaped.
Many economists are predicting further interest rate cuts into 2012, but these will be of little benefit to the investor who is not financially prepared.
Remember – you need to be proactive with your financial strategy and be in complete control of your situation before things turn sour. By doing so, you will avoid the panic that many will undoubtedly feel if the global situation does in fact worsen and ensure you remain sheltered from the next world economic storm.