As banks and super funds start to pull in the purse strings, investors are being cautioned to lower their risk exposure, with concerns a sharp correction could suddenly devalue hundreds of highly leveraged property portfolios.
Greatest fears are held for those investors over 50 years of age, for whom a sharp correction in values could spell disaster, as it would take years (they can ill afford) for their portfolios to recover.
Comparisons have been drawn around the GFC recently, when thousands of investors were left high and dry in the wake of a liquidity crisis that saw large numbers of property and retail hedge funds freeze assets.
When talking property investments, the problem is exacerbated because of the potentially longer selling period to offload assets, particularly in a bear market with falling prices.
So…how do you protect yourself in these less than certain times? Well, the best way is to minimise your risk, by reducing your debt exposure. Doing so means you won’t necessarily be caught with your proverbial pants down if things go pear shaped.
Here are 4 ways you can start to minimise your risk exposure in a more volatile market…
1. Manage your debt pro-actively
You’ve probably heard that old saying, “An ounce of prevention is worth a pound of cure.”
Take some time to plan and prepare today, and you could save yourself an awful lot of mucking about trying to fix your mistakes tomorrow.
When it comes to determining optimal investment goals, strategies and structures according to your exact needs, how you manage the debt pertaining to your investment portfolio is just as important as the location of your assets and the property manager you engage.
Seek counsel from qualified professionals who can assist in managing and structuring your loan portfolio to optimise efficacy and reduce risk.
2. Ensure you’re insured
Whilst 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’re 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. Regular rent reviews and assessments
Given that the rental payments your tenants make will be the primary means by which you consistently manage your property investment expenses, it’s essential that you receive the maximum possible amount for your asset.
A pro-active property manager will be your greatest ally when it comes to establishing a fair market rental price for your investment and then conducting annual appraisals to determine if you can ask your tenants to reasonably pay a little more.
Given the incredibly low interest rate environment and buoyant accommodation market of the day, property investors can easily sustain that enviable, neutrally geared position and stay away prion the danger zone in many instances, just by keeping on top of rent reviews.
4. Maintain a cashflow buffer
It’s essential that you have sufficient cash reserves on hand to allow for any unanticipated expenses that arise. While we’re talking rules of thumb, a good one for your financial buffer is to keep at least 5 per cent worth of your total loan value at hand. These additional funds might even be part of your overall borrowings.
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.
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 to attend to these issues in a timely manner, keeping your tenants on side and happy.
Getting a good sleep is important to us all, and knowing you have money in the bank will no doubt assist in you drifting off to dreamland without needless financial stresses playing on your mind.
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).