With ongoing speculation about an investor fuelled housing bubble and the potential fallout should China’s economic ascension come to a screeching halt, it’s interesting that so many Aussies are still keen to dabble in the property markets.
And as property prices start to cool off in some of the more overheated markets and interest rates are tipped to remain on hold, it’s possible that those who‘ve been contemplating another housing asset acquisition for some time, could take the leap sooner rather than later.
Irrespective of whatever’s occurring around you, as an investor it’s important to cover your bases and ensure your portfolio is stable enough to withstand any sudden changes in the markets.
There’s always an element of risk involved when it comes to investing; 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 plan to mitigate the potential hazards around our changing property markets.
So here are my top 3 tips for investors to ensure they have the capacity to secure, and more importantly retain, top-performing assets in a less than certain economic climate.
1. Be Prepared
Establishing a financial buffer to ensure you can maintain your mortgage repayments should your situation change, and you find yourself experiencing a run of rainy days, is a necessity for successful property investors.
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 shortfalls between rental income and monthly repayments on negatively geared property and hedge against interest rate rises. Not that they’re likely to occur anytime soon…but it’s always best to be safe, right?
Plus, if there is a maintenance emergency with your rental property that requires a quick fix, such as a broken down hot water service, you’ll have the necessary funds at hand to attend to these issues in a timely manner, keeping your tenants on side and happy.
And of course happy tenants often mean long-term tenants. However, should you find yourself with an empty investment property for a few months, your buffer can be another way to make up that lost rental income and keep on top of your repayments.
2. Cover your bases
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 you are sufficiently covered for things like public liability – in case your tenant injures themselves on the premises and decides to sue you. As well as Landlord insurance – to cover payment defaults or damage by tenants.
It also pays to cover yourself. It’s incredible how many people are compelled to insure their car and personal belongings, but don’t consider insuring the most important thing of all – the life they’ve worked so hard to build.
Income protection, in case you are unable to work for some reason (particularly for those who are self employed) is a must, as is life insurance to protect your financial wellbeing should anything happen to you.
3. Buy right
Given that property values are often subject to external forces and can therefore fluctuate up, down or sideways, it’s critical to ensure you approach your investment endeavours strategically.
Wherever possible, purchase your property assets below intrinsic value. This is about buying the right type property at the right price. Over capitalising means it’s likely to take longer for you to start accruing that all-important capital growth.
You also want to ensure that any investment you consider has a history of solid capital growth, in an area that has performed fairly consistently over a long stretch of time.
Ideally, look for housing that outperforms the averages, as the extra growth you gain in the good times will help tide you over during any downturns, providing more consistency over the long term.
Look for an investment that’s aesthetically pleasing and has some element of scarcity, such as unique architectural features. And make sure it has enduring appeal with both tenants and owner-occupiers alike. These make for far more stable investments than things like generic, high-rise apartment towers.
And wherever possible, seek out property that has value add potential, as manufacturing capital growth is the perfect way to make up for slower growth periods in the markets.
About the Author
Since 2008, David Thomas has built a business aimed at servicing the needs of property investors, owner occupiers and small business owners. David is recognised as one of the top 10 independent mortgage brokerages in the country, David and his team have settled almost billions of dollars worth of residential and investment loans over the last decade.
Known for his straightforward, relatable style, David believes by educating people about property funding; they fare better in the market. By sharing his expertise openly, some of the people he educates will likely become his clients. It's a win-win approach.
David Thomas is a credit representative (Representative Number 506153) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237).