How To Prepare For A Global Market Meltdown
As another pandemic lockdown begins to rear its ugly head in parts of Australia, talk is once again turning to concern for the economy. In NSW alone, a lockdown is expected to cost the economy $850 million a week as stated by the NSW Treasury. Within that overall figure, there will be many individuals doing it tough: employees, business owners, some investors and many others.
It is a spanner in the works just as the country seemed to be riding high and roaring its way back early from recession, and it serves as a reminder that we don’t know for certain what might be around the corner. So whether this all leads to one big market meltdown or not, it’s good to be as permanently prepared for the worst as you can be, and there’s no better way than by recession proofing your investment portfolio.
That way, if the unthinkable happens and you lose your job, or your tenants lose their jobs, or some value falls out of the market; your investment portfolio is looking after itself.
Understanding the property cycle
First things first, it’s important to understand that property moves in cycles. Looking back through history, values have gone steadily upwards, but they usually do so with a growth phase, a plateau and then a correction where values drop slightly, followed by a recovery. And then they begin their next cycle with a new growth phase.
Different markets around Australia are often at different stages of their cycles at any one time (the situation this year where property has been booming in value everywhere at once is most unusual), so it’s usually a great time to buy property somewhere, and a great time to get a revalue and pull out some equity somewhere else.
Once you tune into the pulse of the property cycle, you are less likely to overreact when the market corrects.
If you’re a headline reader only, you might fall into the trap of thinking property just goes up and up. You would therefore be more likely to buy any property you can get your hands on without doing proper diligence.
Then, next thing you know you are struggling to make payments on an untenanted property, or bound by a negative cashflow. Even worse, the property might go down in value and you are stuck with a massive mortgage on something that wouldn’t repay the bank if you had to sell.
B Invested clients know that founder Nathan Birch has not built his 230+ property portfolio by buying recklessly. His property investment strategy has always minimised risk along the way.
It’s all in the foundations
The best way that Nathan minimised risk, was to develop a strategy based on three key principles:
- Buy below market value properties
This means you will have a capital buffer if the housing market drops in value.
If you have to sell soon after buying the property due to unforeseen personal circumstances, the buffer will help cover your costs and should also protect you from personal losses.
- Buy properties with a good upside for capital growth
This means investing in areas poised for a growth cycle, rather than jumping on the bandwagon somewhere that’s already been booming. The ideal properties will be in an area with demand and a multi-faceted economy.
- Make sure there is a strong cash flow
Buying properties with a neutral or positive cash flow means you don’t have to dip into your own pocket to fund their associated ongoing costs, as long as your properties stay tenanted. This is especially important if you end up out of work. The loss of income won’t affect your ability to hold and service the investment property. That comfort is a luxury that property investors who choose to engage in negative gearing simply don’t have. Those unlucky souls would be forced to sell pretty quickly, which is never an ideal position to be in.
Affordability means demand
Nathan Birch built his foundation property portfolio by investing in properties at the affordable end of the property market. Why? Because there will always be demand for affordable housing. If global markets do melt down, it may be difficult to find families who can afford to spend $1000 a week on rent. But, there will always be families in the $500 a week or less bracket. And if renters find themselves unemployed during the fallout from the next lockdown, they will find it easier to pay this lower level of rent with the Government stimulus payments that are likely to be rolled out.
When economic disaster strikes
Doing all of the above things while building your property portfolio will help you survive an economic recession or depression.
If you’re particularly smart, you may not just survive, but thrive. Say your property portfolio is protected and your cashflow is solid, you may even be in a position to make some great further investments if values fall temporarily in markets that suit your strategy.