How to “Future Proof” your property portfolio so you don’t have to sell it when interest rates rise or the economy struggles Posted on January 13, 2019September 16, 2019 by Arjun You’ve probably been to a barbeque where somebody tells you not to invest in the property market because interest rates might rise, or the economy might struggle, or it’s all doom and gloom, etc etc… Hey, I don’t have a crystal ball – and yes, all that stuff might happen – but there are ways that you can prepare your portfolio for a negative downturn event, so you can maintain (and continue to expand) it without having to sell some or all of your properties. Here are my best tips for future-proofing your property portfolio: Consider positive cashflow properties Strategy number one is to make sure your properties provide positive cashflow. What does “positive cashflow” mean? You achieve positive cashflow when you own a property that has a rental income (the weekly payment you get from tenants, also known as ‘yield’) that’s higher than its outgoings (outgoings = the cost to KEEP the property, for example interest only mortgage repayments, insurance, rates etc). This means you have money coming back into your pocket each and every week you own the property. The key benefit of having positive cashflow properties means that if interest rates DO rise, and your mortgage requires higher repayments every week, then all YOU need to take care of is the difference (the amount that your tenants aren’t paying). Buy properties for less than they’re worth Another strategy for future-proofing your portfolio is to find and buy properties that are priced less than they’re worth. Buying properties for less than they’re worth often gives you ‘instant equity’… meaning as soon as you buy the property, it contains equity that you can leverage for future opportunities (and save in case of emergency). In most cases, they will require other comparable properties to have a) sold for more & b) to continue selling for more after your purchase. Here are some ways to find properties for sale for less than they’re worth: Track and monitor property prices in hot suburbs, and single out potential opportunities Set up email alerts on real estate websites for properties with certain prices in certain areas Engage a buyer’s agent like InvestorKit. We have access to private and unlisted property opportunities across the country… which means ‘first dibs’ on attractive property deals. Further to this our negotiation strategies also enable improved chances of getting a better discount on purchase. Commercial Properties Commercial properties can often withstand downturned economic environments better than residential property. Why? Commercial properties offer: Longer leasesHigher yieldsBuilt in increases within your lease Outgoings that are paid by your tenants Valuable additions to the property (ie. fit outs) that are paid for by the tenant All of this means you can maintain a property with less outgoings. Commercial property can offer investors significant tax advantages, in comparison to residential property. This is through minimal to zero restrictions depreciation, although these should be discussed with your tax advisor. Look for low vacancy rates Investing in suburbs with low vacancy rates is another way to avoid a tenant-less investment. A suburb’s vacancy rate is a percentage that represents how vacant (or empty) rental properties are in an area… and gives you an indication of rental demand. For investors, higher rental demand is better… because it means you can safely ask for a higher weekly rent. Below 2% vacancy rates are considered ‘tight’ rental markets, and are also known as a ‘landlord’s market.’ A 3% vacancy rate is labelled as the balance between landlords and renters. When rates get above 3% we move into the ‘renter’s market,’ which is a market that’s not as favourable for landlords. Your goal is to have a tenant in your property for 100% of the time. Low vacancy rates will help make sure this has a higher chance of happening. Invest in areas with a wide workforce diversity Another strategy to increase the resilience of your portfolio is to buy properties in areas with a wide workforce diversity. What does this mean? A wide workforce diversity means that a particular area/suburb/town is home to workers of all types: blue collar, white collar, and self-employed etc. in different organisations and industries. If a particular single industry was to see a downturn, this workforce won’t be majorly impacted, because the impact is spread across the whole population of the area. On the flipside, an area with a low workforce diversity might be a mining town. If the mine clears up, people will no longer have an income, which means they need to move away… which will negatively impact property prices. Areas with a wide workforce diversity generally cope better when there is a localised economic downturn. Australia’s core metropolitan areas generally have a wide workforce diversity, however there are smaller pockets across Australia featuring a high workforce diversity rate. Diversify your portfolio Diversifying your portfolio is another strategy designed to insulate you from ups and downs in the property market. For example, let’s say you owned five houses on the same street of the same suburb. What happens if that suburb takes a hit in property valuations? Your whole portfolio probably takes a hit… meaning your whole portfolio has decreased in value. Now let’s say you own five properties, of different types (house and land, commercial, unit block, etc.) in different suburbs across Australia. You’ve done your research and all of these properties are in areas that have a potential upside for growth and provide positive cashflow. What happens if one of those properties takes a hit? Chances are, you’ll be much better off because your other investments are holding fast. To learn more about diversifying, take a look at this YouTube video: Have cash buffers in place Another tip is to have cash buffers in place, in case you get in to trouble — which means having cash in an account ready to go, in case your tenants cannot pay. How much do you need? Having three months worth of principle and interest repayments for an aggressive investor jumping between investments, or six months worth of principle and interest repayments for a passive investor taking their time in between purchases, are good rules of thumb. Invest in multi-dwelling properties Multi-dwelling properties are properties that fit a higher number of tenants on a property’s land allocation. Generally speaking, more tenants equals more income for investors. Multi-dwelling properties can come in all shapes in sizes, for example: House with a granny flatDual OccupancyDuplexUnit BlockTownhouse Block etc… It’s also important to remember that all of the above can come as new or existing properties. Further to this, having more than one tenant in a carefully selected area with demonstrated rental stability can have reduced cash flow impact when there are vacancies. Why is this the case? Generally, multi-dwelling property landlords prefer to start their leases at different times, so as one leaves you will still have the others providing you with income. In traditional properties, if your solo tenant leaves, your whole income is disrupted. Manage your money Lastly, having strong financial skills will help you overcome any economic pressures incurred by a struggling property market. This might sound obvious, however the money-saving strategies below helped me save for my portfolio of 9 properties within 2.5 years. The three disciplines you need to consider when saving At a high level there are three money disciplines you need to master: IncomeSavings (Let’s now call this STORAGE)Expenses (Let’s now call this RESTRICTIONS) Income Your income – or particularly the amount of income you can save, is priority number one. Based on my personal experience (and that of my most successful clients), the sweet spot is to save about 40% to 50% of your net income into your savings account on payday or at latest the day after. Why do I recommend this? If you start off with saving 40% of your income first, then managing your storage second, and then managing your restrictions, you’re going to be able to massage your restrictions better (because you know what’s available it yours to spend). And most importantly, rather than a goal of how much or little you should spend, you’ve already achieved a goal of storing 40% of your income. You could then challenge yourself to increase this percentage as your comfort levels improve. Storage Why do I keep saying “STORAGE”? What does “storage” even mean? Why not say savings? Because when I was saving, I was simply saving to save. Although it’s just a ‘word’, it was a mindset shift too. When storing my money, I know I’m going to invest it one day to hopefully multiply the money or generate passive income from it. The money was just temporarily “stored” for later use. Once you’re in the savings rhythm… try and ‘trim the fat’ to save more So you’ve paid yourself first into your storage account, you have goals and timelines of how much you will have by when as it’s measurable e.g. ‘40%’ of your pay put aside (minimum), and now what’s left is yours (well, almost all yours). This is the part when cost cutting comes into play. Do your best to keep some creature comforts, but also make sacrifices here and there so you can save faster. Pro-tip: Use joint accounts, if you can After careful budgeting and removing the things I didn’t need I turned to a method to ensure I would not find myself in trouble. I used joint accounts with loved ones that required ‘two signatures to operate’ as my ‘jail’ on the funds. Although not everyone can do this, it is one way that I used to ensure it was all in on my cost cutting, now that the good deeds were done. What happens if saving 40% seems like too much? “40% just cant be done!! 40% on my current wage is just not going to happen, I am restricting all I can!” I hear you, 40% might seems like a lot. At this stage, many either give up or look for help but don’t get the honesty given to them. This is why cost-cutting your way to riches is not sustainable for many and not achievable. For some it could genuinely be an expense problem they don’t see, but for the majority it’s an INCOME PROBLEM. Do you have an income problem? If your saving behaviours are there and cost cutting is present, to achieve your savings goals and do it sustainably rather than the up and down roller coaster you may need to focus your attention on INCOME (the topic many don’t like to talk about). Think of different ways you can increase your income. Can you ask for a payrise? Can you start a side business? Are there any other ways you can increase your income? You need to move forward with a ‘producer’ mindset… where you use your skills to produce more money. Just remember, on financial statements the INCOME LINE is the big TOP LINE that carries all of the smaller expenses. It is one that must overpower anything in its way, so the BOTTOM LINE has something to show on the other side. Restrictions (AKA Expenses) Lastly, managing your restrictions is the discipline of lowering your expenses and minimising them. One example that is commonly heard is the “the coffee cutting” or saying goodbye to your avocado toasts. I’ve left restricting to the very end, because in your mind, you shouldn’t be restricting first. You should be storing first, and then restricting your expenses to whatever money you have left over. Doing this, you will very quickly realise that when you flip that around and change your priorities by saving first (or storing first) your savings/storage goals plus restrictions are all being managed much better. If you’d like me to explain this in more detail, take a look at this video here: Don’t invest in a slice… invest in the whole pie Lastly, don’t buy a slice of an asset. Instead, buy the whole pie. Watch this video and allow me to explain: Ready to get started? If you’d like to strengthen your property portfolio so it weathers and survives periods of economic downturn, reach out for a confidential discussion where I’ll explain how I can help find your very own positive cashflow properties. We’ll take a look at your current situation in-depth and I’ll help set you on a course of action that grows your wealth faster.