Regardless of an individual property investor’s destination, your ability to effectively manage unexpected events will help you avoid cashflow crises and major losses. Things can and will go wrong – it’s part of life. It happens to everybody and will test you, but it’s the experience you bring to these circumstances that really matters. Success lies with allowing for the unexpected from the start and building in mechanisms to help solve the problems to help mitigate risk.
Don’t follow the pack
I see a lot of people follow their friends’ strategies – buying in the same areas, even down to the same streets – and it’s not always that simple. Building the right property portfolio for your own needs comes back to your individual blueprint for success and personal capacity – where you’re at in life, where you want to go, where your comfort zone lies. It’s as unique as you, which means there’s no cookie cutter solution.
Account for your lifestyle costs
De-risk the process from the start by thoroughly accounting for lifestyle costs. You’ll then gain a true assessment of what you can afford to contribute to an investment property (for me, this means purchasing dwellings where rent covers at least 90% of expenses in order to protect my bottom line). Keep 12 months’ worth of these ‘survival figures’ in the bank to cover your risk – your lifestyle expenses plus required investment contributions.
Safeguard your liquid assets
Hold on to your cash and use the bank’s money to fund your real estate purchases. Every single successful company has used other people’s money to build their businesses – and as your property investment portfolio is a business, this is what you should do too. If you’ve got the choice between using equity in your home or cash savings, opt for equity every time. As a liquid asset, your cash should be preserved.
Buy well at the beginning
Key components of your purchasing strategy are to find something that rents well, then buy under market value – if you don’t get this right from the start, things will go wrong and it can be very costly to rectify the situation. Regardless of whether you’re new to investing or an experienced portfolio holder, your strategy will need expert help each time to identify the best property for your needs.
Have the right support people in place
Work with people who’ve gone down the path themselves and may have seen the property investment journey to the end. They will have had their own challenges and successes, with this knowledge crucial to guiding your own risk management strategies. Seek out property mentors, brokers and accountants who’ve performed better than you to date – their experiences will help you raise your own performance to their level of success.
Find people who are loyal to you
Transparency is a must as you develop your support team, so put your blinkers on if you find anyone heading straight for the sales pitch. When they’re employed by another professional, it’s difficult to think past their own priorities. Whether their involvement extends past the sales process is also telling – will they still be there 10 years down the track to work on your portfolio blueprint, or disappear once contracts are signed?
Keep on top with regular assessments
You need to treat your property portfolio as a business, which means it requires built-in reviews. Hold everyone in your team accountable and work with your property mentor to assess performance, broker to get valuations, accountant to ensure your tax affairs are in order and property manager for rental reviews. You can’t be out of your portfolio, you have to be working in it – take responsibility and know exactly where you stand.
Problem solve, don’t panic
Only experience can prevent full-scale panic when problems arise, as I experienced with an unexpected rental default situation. My long-term tenant had reliably paid until that point, so I went back to the drawing board with the property manager to discover the cause. We developed a payment plan and the situation soon dissolved. Anyone less experienced may have initiated legal proceedings, causing a larger problem than was needed.
Know when to cut your losses
Sometimes there’s nothing that can be done to rectify a situation and a falling asset valuation provides the perfect example. You may have bought a property in an area that wasn’t ever going to be what it promised. When your annual assessment reveals this poor performance, it’s time to act. The opportunity cost of not cutting your losses will be far more if you continue to hold.
Don’t wait until it’s too late
Be prepared to take bold steps in your property investment journey. With the right team behind you, it’s been said that the real risk lies with not taking any risks at all. Property investment can be overwhelming and can be a challenge, but a firm strategy can mitigate against the unexpected. The sooner you start making steps toward your destination, the better for your long-term blueprint for success.
As appeared in API Magazine