I was chatting to a psychologist friend the other day regarding perspective and preparation. For many years, I’ve erred on the side of caution when it comes to ‘looking on the bright side’. While I like to hope for the best, I generally plan for the worst. That way you can’t be caught out right?
She responded, as psychologists are wont to do, with the results of a study she’d recently stumbled on that suggested otherwise. In a nutshell, the researchers concluded that the disappointment experienced when something doesn’t go as planned is just as palpable if you try to prepare yourself for it by anticipating a negative outcome.
On the other hand, if you remain positive in the lead up to the outcome, then you haven’t potentially soured the journey to get there with a lot of negative emotions.
Some would even suggest a ‘can do’ attitude might generate a desirable result.
All self help insights aside, the point I want to make is that for property investors, it really is smart to assess and understand your ‘worse case’ scenarios.
The idea being…know what possible eventualities you’re preparing for by way of a risk analysis, while having the confidence in your decisions to optimistically embrace the actions required to reach your objectives. Got it?
I don’t know…sounds a lot like preparing for the worst but hoping for the best to me. Either way, here are 5 questions to help you become a more prepared property investor…
- What if interest rates rise?
It’s not so much case of ‘if’ as ‘when’ really. Indefinite low interest rates as the ‘norm’ would essentially mean our current economic model is dying a slow death, which may well be the case.
But ever the optimist, I like to think that one day, who knows when, the tide will turn and interest rates will again start to rise as influential world economies meander back on track.
When that day comes, will you be prepared? There’s no doubt some who’ve entered the market in recent times will potentially feel the pinch if they’re unaccustomed to anything but cheap credit. Comfortable in the current status quo, some will undoubtedly drown in debt when their repayments start to rise.
The key is to crunch the numbers from the outset with a decent interest rate buffer, thereby giving yourself a good deal of financial breathing space if AND WHEN interest rates start to creep up again.
- What if the bottom falls out of the market?
Ah…the perpetual ‘what if’ that probably locks more people out of an income generating property portfolio and independent retirement wealth than any other nagging doubt…but a great one to consider in order to be a better investor.
Rather than scare yourself into inertia when contemplating future market activity, the idea is to understand that not all property markets are created equal.
Hence, you’ll be more likely to do your homework and identify a quality investment over a subpar location that doesn’t have the endurance to perform above long-term averages.
Yet again, this instills the necessary confidence in your investment decisions to take positive action.
- What if my financial circumstances change?
Life is an unpredictable myriad of moments…highs, lows and all the mundane stuff in between. While it can be confronting to face the prospect of life altering directions that send you into a financial tailspin, we never know what’s around the corner.
Taking on a significant commitment, in the form of a property investment loan, means being able to meet that commitment over many years in order to maintain your portfolio.
When reviewing the figures for your loan application, think about whether the debt still looks as manageable if say, you have no personal or rental income for a prolonged period.
You should also prepare a cashflow buffer to see you through any ‘rainy day’ events along the way.
- Will my rental income be enough for the repayments?
If you feel confident that your property has the potential to generate sufficient income from tenants to service the monthly mortgage, without the need for you to dig too deep into your own pockets, it’s likely your equity position is pretty solid.
However, if your mortgage repayments might require a substantial top up from your personal income each month, you need to consider where things are falling short, particularly in this low rate environment.
- How should I structure the purchase?
This is another critical consideration that many ‘newbie’ investors simply fail to spend sufficient time thinking about or seeking expert guidance with, but one that will make the world of difference to your portfolio.
It’s a particularly important question if you happen to be buying in a partnership or collective type arrangement, as you want assurance that the agreement will prevail as long as you need it to in order to reap the desired dividends.
Not wanting to sound negative…you need to consider whether those you call friend or purchasing partner today, will still be perceived in such a familiar and personable light tomorrow. Life is full of surprises after all!