Property investing can be risky business, and things can go pear-shaped every now and then. So how can property investors bounce back from a financial mistake?
Whether you’ve defaulted on your mortgage repayments, encountered cash flow problems due to untenanted periods, or you haven’t benefited from capital gain, there are many ways that property investor numbers can head south.
Although some factors are outside your control, such as the performance of the market and the wider economy, there are factors that you can control when it comes to your investment knowledge and financial discipline.
If something goes wrong, you need to sit back and rethink your strategy and financial position. Find out how you can learn from your mistakes in order to move forward and regain control of your portfolio.
Review your financial position and lifestyle (candidly)
You need to take an honest look at your cash flow to understand where you went wrong. What happened? Could it have been avoided? Was it within your control? How can you protect yourself in the future? What will you do differently next time?
For example, if you attempted to time the market and bought in an area during an upswing, and then your property fell in value, you may reconsider your future research. If you purchased the property solely based on the short-term price growth, you want to make a conscious effort to review the historical price growth data for the area of your next investment.
Sit down with a tax accountant or a financial adviser who can help you understand what happened and help you devise a plan to revitalise your finances.
Consider whether you have good credit history, job security, and whether you have enough assets or income sources to take on an investment loan. Think about your plans for the future and whether any major lifestyle changes (such as having kids or moving overseas) will influence your ability to manage your investments.
Once you’ve identified where you went wrong, you need to change your financial behaviour in order to establish a sound investment strategy.Back to top
Change your financial behaviour
Order a copy of your credit file to review your financial position and to see whether you need to improve your credit status. You may need to take measures to trim your existing debt (such as credit cards or a car loan). Try to make regular deposits into a high-interest savings account.
Another way to improve your financial well-being is to build up a cash buffer and plan for a worst-case scenario. Try to build up at least 3-6 months of property expenses so that you are prepared for any curve balls that are thrown your way. Generally, you should aim to have at least $10,000 - $15,000 in a savings or offset account.Back to top
Identify your investment strategy
If you’ve recently encountered financial hardship, you should work towards a low-risk investment strategy. You can help lower your risk profile by undertaking exhaustive market research, enlisting the help of experts such as an accountant, a mortgage broker and a property investment specialist, and crunching the numbers.
Diversifying your portfolio is a good way to minimise your risk. This involves investing in different locations and different dwelling types. This also means investing in locations that are at different stages of the property cycle, as this will provide you with a flexible exit strategy. For example, when it comes time to sell, you can choose to sell the property based in the market that is experiencing an upturn.
Another key decision is whether or not you want the property to be positively or negatively geared and how you will benefit from a tax and cash flow perspective.
You may want to consider building up equity in your home and then using the equity to buy an investment property when you are emotionally and financially ready.
Another option to boost your cash flow is to rent out a room in your principal place of residence (PPOR).Back to top
Regularly review your portfolio
Investment best practice involves frequently reviewing your portfolio to ensure that each property is working for you. You should view your investment portfolio as a business. This requires continued research and management.
For instance, you should ensure that you’re in-the-know when it comes to local property prices. If the suburb experiences price growth, this may be grounds for you to charge higher rent.
Alternatively, if you speak to local agents, you may discover some maintenance or upgrades that could add value to the property.Back to top
Be finance savvy
A conservative approach will mean that you’ll carefully consider the features and structure of your investment loan to ensure that it works for you. Work with a mortgage broker to review your borrowing options and find the best structure.
For instance, it’s advised that you keep around 3-6 months of expenses in an offset account to ensure that you have a contingency buffer. You may want to find a loan that enables you to make extra repayments without penalty.
You may also want to opt for an interest-only loan so that you can reap the tax benefits each financial year.Back to topImage: Shutterstock