How to Thrive as a Property Investor in a Declining Market (and Pandemic)
On this week’s episode, I want to share with you the 6 things you need to do to thrive in a declining property market. With COVID-19 ripping through economies across the world, investors who are solely banking on organic capital growth with negatively geared properties are suffering immensely. So what do you do?
00:00 – Intro
01:17 – Trying to forecast the future of property
03:35 – Keeping a cash reserve
05:20 – Having something generating incomeRead More
06:03 – Tracking the credit environment
07:21 – Offload investments that don’t serve a lot
11:20 – Not the time to be chasing/relying on capital growth
16:09 – Concluding thoughts
Most of the opinions being published in the media are crystal ball gazing and predictions of what will happen.
But here’s the truth: no one can accurately predict what’s going to happen.Read More
On the one hand, there are ‘experts’ who spell doom and gloom, forecasting the market will tank and on the other side there are those saying, ‘buy, buy, buy’, it’ll all be okay.
Governments are getting better at pulling different levers, using reforms or legislative changes to counteract fractures in the economy. So if the Government pulls a rabbit out of their hat, it could change everything.
So as a property investor, what do you do?
From my perspective, gambling is for punters, and I gave up trying to predict the market years ago. Whether the market goes up, down or sideways… I’m looking for certainty.
In times of uncertainty, I believe that you must position yourself defensively first.
Just like how elite football teams win championships on the back of their defence, no matter how good your offence is, you’re most likely leaving yourself exposed at the back.
So I want to share with you six things you need to do to ensure you thrive as a property investor in a declining market.
Note – while the pandemic is a once in a century event, these principles still apply to any downturn, recession, or volatility in the market.
1. Get Your House in Order
This is simply a reference to review your financial situation with a fine-tooth comb. Look for opportunities to improve your stability, reduce outgoings and remove reliance on any single income stream.
Ensure you keep sufficient cash reserves on hand. Given the historic decade of unprecedented growth in the market, investors have tended to push the limit with keeping minimal cash reserves and having the view that the market will provide a better return rather than having cash sit in the banks.
While that’s true during a boom, we’re growing through a turbulent period. I encourage you to look at keeping 3 to 4 months of living expense on hand as you can’t predict what the next 12 months will look like.
2. Look for Investments That Generate Cash Flow
Cash is king, especially in a crisis. One of the best methods to develop immunity to economic downturns is developing multiple sources of income through investing.
In a low interest rate environment, leaving your money in the bank is likely to erode over time. It is now important to be looking at opportunities that might otherwise be considered unconventional. Unconventional doesn’t have to mean weird or risky, but it does mean beyond conventional wisdom.
In my world, alternative property strategies are not reliant on a rising market, do not require high sums of capital to access, allow true diversification, structured for strong downside protection and offer high (8-15% pa NET returns) consistent cash-flow.
These should be an essential part of every smart investor’s portfolio.
3. Track the Lending Environment
The banks rarely lose and are a very good gauge of investor confidence and market performance. Given the resources they have and the extensive research they undertake, observing and being aware of their lending behaviour is one good barometer for the way they feel the market is heading.
Tough lending is usually a sign that banks are behaving cautiously and perhaps feeling nervous about the economic climate. Credit is a critical part of the economy, and given the fact that the property market is driven by what’s available in credit, banks are a good gauge for what’s happening.
As credit becomes tighter, this will mean fewer buyers with access to funds, directly impacting the demand for property and often resulting in a drop in property prices.
4. Consider Offloading Investments That Don’t Serve You
Many Australian property investors seek wealth and financial freedom by banking on capital growth as a strategy. This works in a rising market, but in a downturn, or volatile market, gains can evaporate quickly.
In a nation gone mad on negative gearing, I’d be questioning this strategy right now. Look at your exposure from the viewpoint of vulnerability. For example, if you rely on your business to fund cash-shortfalls in your portfolio, I’d be looking critically at all my investments to find opportunities to alleviate the bleed.
Even for those who are wealthier and feel they can carry the cost until the market recovers, it is still important to recognise the opportunity cost of holding dud investments.
While old-fashioned wisdom tells you never to sell, I think this is dogma. When you consider factors such as financial and mental stress (the sleep-at-night factor), eliminating cash-drains and underperforming assets can be a step in the right direction.
5. Evaluate Your Overarching Wealth Strategy
If you can only build wealth in a rising market, it’s time to re-evaluate.
It can be easy to be swept along and opportunistically purchase investment properties. I certainly did plenty of that myself in my earlier years.
Do you remember the property gurus that used to advocate ’10 properties in 10 years?’ Or those that argue buy and eventually one day, you’ll be rich.
Well I can tell you, I’ve worked with many people who hold way more than ten properties and without their businesses, they are wealthy on paper (i.e. have a high net worth), but they are still miles from financial freedom.
Sometimes more is NOT better.
Because our property market is so expensive, you can not afford to purchase assets that do not serve you. If you haven’t already, make time to evaluate your financial goals and figure out if the current market uncertainty jeopardises this in any way.
Think about what you are trying to achieve, identify the strategies that support that and then only invest in assets which align with your goals.
6. Educate Yourself And Eliminate Abdication
Being empowered to make your own investment decisions is harder than it sounds. We live in a world where many people and industries get paid based on making things seem ‘complex’.
There has literally never been a better time to take charge of your wealth-building decisions. Notice all the places where you abdicate responsibility to others and evaluate the merit of this relationship.
Remind yourself that just because you don’t understand something, or feel it’s unfamiliar, doesn’t make it inherently risky. The single best way to de-risk anything is to increase your knowledge and familiarity.
Speak to people who have the results you want. Ignore the doomsayers who tell you to accept your financial results and prepare for the worst.
Remember, if you want to generate solid returns in your investment regardless of the economic climate, you must do two things; firstly look where others are not looking and secondly demand a higher ROI than what society tells you is normal.
Positioning yourself defensively is super important.
Don’t be motivated by FOMO. It’s a tactic used by a lot of ‘educators’ and ‘deal makers’ who are spruiking the idea that you should continue to buy. If you know you’re susceptible to FOMO, I’d highly recommend you hose this right down and focus on positioning yourself defensively.
A market downturn spells the need to focus on what you have and how you can optimise your investments so that they’re not bleeding you dry. Beyond that, if you feel that your house is in order, then it’s a matter of looking into investment opportunities that don’t entirely bank on organic capital growth.
My investment philosophy and what I teach to my clients has always been about finding investments that aren’t concerned with economic turbulence.
I focus on A-grade investment deals. This means they are affordable, they have good downside protection, and they do not rely on a rising market. I find these by looking beyond the mainstream.
If you have an under-performing portfolio of properties and are looking to improve your investment position to achieve financial freedom quickly, then get in touch with me to find out how I can help.
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