I’M IN FINANCIAL DIFFICULTY AND NEED CASH , SHOULD I SELL AN INVESTMENT PROPERTY ?
Sometimes life doesn’t go according to plan and you could find yourself in financial difficulty and need cash. You may lose your job, become unable to work for a period of time, or suffer the tragic loss of a loved one. Circumstances such as these can be difficult to deal with – not just emotionally and physically, but financially as well. If an unexpected event is causing financial strain in your life, you may feel inclined to sell an investment property – but is this really the best way forward? There are a number of things you can do that may help to keep you afloat while allowing you to stay in possession of your assets.
HAVING A WELL THOUGHT-OUT EXIT STRATEGY
As an investor, it is important to have a Plan B, says Daniel Young, co-founder of Binvested. But a thorough contingency plan doesn’t stop there, he says. It is important to have more than one back up plan in order to protect you from losing your investments. “People don’t plan to fail, but they fail to plan in the first place,” he says. They may think that if anything goes wrong they can just sell their investment and come out even, but more often than not, they will still be out of pocket. If you have to sell quickly, it is likely you will end up selling at a reduced price – as well as needing to cover exit costs. Having a well thought-out exit strategy, that includes a plan B, plan C and plan D, will enable you to either hold on to your investments or sell them at a profit.
DON’T LIVE OFF EQUITY
Graham Turnbull, Senior finance strategist for Zinger, advises investors to avoid living off equity. He says, if you take out equity to live off, “you will have to pay the mortgage repayments. “The question is,” says Turnbull, if you are suffering financial hardship, then “how are you going to pay that mortgage off?” He says, “equity is your money from your property, but the bank is lending it to you on an interest basis – so you have to pay that interest back.” Instead, says Turnbull, you should look at other possible options that may help to improve your cash flow and reduce your repayments.
HAVING THE RIGHT TEAM OF EXPERTS
Finding the best way forward for clients facing financial difficulty is a “case by case situation,” says Turnbull. If you have the right mortgage broker, accountant and financial planner on your side from day one, it is less likely you will find yourself scrounging for cash after hitting rock bottom. A trusted financial planner will be able to help you identify potential risks and find the right products and strategies to mitigate them before you even begin purchasing. Your accountant should be able to assess how your investing may impact your cash flow and taxation requirements. Your broker should set up the right borrowing structure from the start, and be able to look at ways to improve your cash-flow when unexpected life events take a toll on your finances. It is also important to choose professionals who have a proven track record for helping investors grow and maintain large property portfolios, and who are investors themselves.
EXPLORE ALL OTHER OPTIONS BEFORE SELLING
Turnbull says the following strategies may be helpful for investors who are experiencing financial difficulty. Before making any decisions, however, it is important to discuss your situation with your mortgage broker, accountant and financial planner in order to find the best solution for you.
RENTING OUT YOUR HOME
If your principle place of residence holds the potential for bringing in higher rent than your investments, you may want to consider renting it out and moving into a smaller property. Make sure the improvement in your cash flow will outweigh any moving, renting and living expenses that you may incur by doing so.
REFINANCING TO A LOWER INTEREST RATE
Paying a lower rate of interest should help to improve your cash flow. Your broker will be able to assess whether refinancing or fixing rates will be a helpful strategy for you. They should also identify whether this will affect your ability to access equity if you want to continue investing in the future.
CHANGING REPAYMENTS TO INTEREST ONLY
If you are making principle plus interest repayments on your loan, changing to interest only will reduce your monthly mortgage costs in the short term. Your broker will be able to identify if this is possible for you.
If you haven’t done so recently, you may want to review how much rent you are charging. By doing some ground work, you will be able to identify whether the rent you are charging is in line with the current market. Doing this regularly will help to improve your cash flow and keep your finger on the pulse. Remember, good property managers are few and far between – they don’t always conduct regular rent reviews. Daniel Young says investors should manage their property manager to make sure they are keeping on top of things. This can prevent arrears from growing, vacancies from becoming prolonged and rent falling below market value.