Imagine you had spent several years building your house only to hear that a cyclone was on its way. Would you abandon your home and move to another country? Or would you simply batten down the hatches and protect your home the best you could?
According to Nathan Birch, seasoned property investor and co-founder of Binvested, the mother of all economic storms is about to hit – the GFD.
But, that doesn’t mean we should sell everything and hope for the best. It simply means we should prepare for the storm so that we come out unscathed.
Cashflow and liquidity are key.
According to Nathan, the two most important things for investors to sort out now, before the storm hits, are cashflow and liquidity.
He says it would be stupid to hold onto cash over the long term thanks to inflation, but – having cash at hand over the short term is essential in this sort of environment.
A period of tougher finance is highly likely during this time, making it more difficult to access equity and borrowed funds.
The importance of having a buffer.
Having cash at hand means you will have a buffer against any unexpected costs. It also means you will have a way to invest in the next great opportunity when it presents itself.
What Nathan is doing to prepare.
Aside from strengthening his cashflow and liquidating to get capital, Nathan is diversifying into other assets and looking for opportunities to pick up bargains.
He says he has always invested in other asset classes, but that property is his favourite.
The reason he diversifies his investments across other asset classes is to ensure better liquidity.
Liquidity means that you have cash in hand or quick access to cash.
When it comes to other assets, Nathan looks for things he can get out of quickly and things he can get capital out of quickly.
This helps to prevent against him needing to sell properties should he require capital for his next deal.
Don’t treat your house like an ATM.
Nathan cautions against taking out equity to spend on luxury goods such as cars or holidays. Those who aren’t prepared for a tougher lending environment may struggle to survive during the GFC.
He also cautions against making irrational decisions. For instance, an investor may decide to sell half their portfolio of properties – but find they can’t fund the same number of purchases to bring the portfolio back to this amount.
He says, if you are in a position where you need to sell a property, then sell it now.
But make sure you know where you stand financially before making any major decisions.
Binvested has financial advisors who can help to identify where you are at and what you may need to do to improve your financial position.
Quantitative easing versus quantitative tightening.
We saw a lot of quantitative easing following the GFC. Now, we are experiencing a period of quantitative tightening. A winding back of liquidity in this sort of environment could have a big impact on all of us.
But, if we take the precautionary steps we need to now, then we will stay protected throughout this short-term storm. And once it has all blown over, we will be in a good position to take advantage of the next cycle.
Find out more about the GFD, and how you can weather the storm comfortably below.