With ongoing uncertainty about the world’s economies and the fallout for Australia’s economy should China’s rapid development come to a screeching halt, it’s little wonder that some would-be property investors are shying away from our real estate markets at the moment.
Consumer confidence is shaky and the thought of taking on a large mortgage is just too much for some people to fathom.
Which is a shame really, because now is the time to be buying up big!
A golden opportunity
When the markets are quiet and the availability of stock far outweighs buyer demand, seasoned investors tend to strike, knowing all too well that these conditions create the perfect property investment storm.
They’ve seen the ups and downs and know that wealth creation in real estate comes about through a sound long term strategy of buying and holding well performing assets and occasionally manufacturing some capital growth with minor cosmetic enhancements (to their property, not themselves!).
Sure there is always an element of risk involved when it comes to property investment; what if your situation changes and you lose your job or can’t find a suitable tenant? What if your income or ability to meet your mortgage repayments becomes an issue?
But as with any type of investment risk, you can (and should) put plans in place to mitigate the potential hazards if this is the investment vehicle you choose to drive you to financial freedom.
So here are my top three protection tips for investors to ensure they have the capacity to secure, and more importantly retain, that top-performing asset in a cooler real estate climate.
1. Hope for the best, expect the worst or Be Prepared!
No matter how you say it, having a financial buffer in place to ensure you can manage if your situation changes and you find yourself experiencing a run of rainy days is a necessity for successful property investors.
Establishing a line of credit or offset account linked to your loan is one of the best ways to maintain a cash buffer, as it has the added benefit of helping to reduce the amount of interest applied to your loan.
This reserve can be used to cover shortfall between the rental income and monthly repayments on negatively geared property and hedge against interest rate rises.
Plus, if there is a maintenance emergency that requires a quick cash fix, such as a broken down hot water service or leaky roof, you will have the funds available to attend to such issues in a timely manner, thereby keeping your tenants on side and happy.
Happy tenants often mean long-term tenants, but should you find yourself with an empty investment property for a while, your buffer can be another way to make up that lost rental income and keep on top of your repayments.
And of course, there are always unforeseen expenses that crop up when you own property – particularly if you have an extensive portfolio. Essentially, it’s reassuring to know you can weather any financial storm that might come your way…when you least expect it!
2. Cover up!
There has been a lot of talk about the hefty insurance bills people are being hit with in areas that have experienced natural disasters over the past couple of years (yes, I’m talking about Queensland!).
And while handing over a large sum of money to an insurance company probably doesn’t make you jump for joy, having adequate cover to protect you in the case of an unfortunate event will certainly soften the blow. Plus, as an investor, your policy cost is a tax deduction!
Make sure you read your policy carefully and ensure there is sufficient cover for things like;
• Public liability – in case your tenant injures themselves on the premises and decides to sue you.
• Landlord’s insurance – to cover payment defaults or damage by the tenant.
It also pays to cover yourself; I am amazed at how many people see it as a necessity to insure their car and personal belongings, but don’t even consider insuring the most important thing of all – the life they’ve worked so hard to build!
Income protection, in case you find yourself unable to work for some reason (particularly if you are self employed) is a must, as is life insurance to protect your family’s financial wellbeing should anything happen to you. Because, let’s face it, the banks are not all that understanding should tragedy strike.
3. Buy right!
While property values will always fluctuate, as is the case with any cyclical investment vehicle affected by external economic forces, and our property markets are currently flat, at Metropole we protect our clients using a four pronged, strategic approach;
a) Always buy property below its intrinsic value. You make your money by purchasing the right type of property and buying at the right price. Over capitalizing means it will take longer for you to get that all-important capital growth you need to continue adding to your portfolio.
b) Buy a property in an area that has a strong history of capital growth. You want a property that outperforms the averages, as the extra growth you gain in the good times, will help tide you over during any downturns and ensure that in the long term you achieve a consistent, above average rate of appreciation.
c) Buy property with a twist. Look for an investment that is aesthetically pleasing, has some element of scarcity such as unique architectural features and that will appeal to tenants and owner-occupiers alike.
d) Buy a property that has value add potential. Manufacturing capital growth is the perfect way to make up for these slower markets in which we currently find ourselves. Find a diamond in the rough that needs a slight polish, nothing too drastic – just some new floor coverings, a coat of paint and a spruce up of the old amenities.
This four-tiered approach helps us as property strategists to protect clients and ensure they can weather any rough patches that come their way.
With each tier adding value over time, investors can afford for one or two elements of their portfolio to let you down now and again, because one or more of the other elements will still work in the investor’s favour.
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