What happens if the sky falls down?
With Nathan’s recent talk of a coming global financial depression, you may be inclined to ask the following questions:
What will I do if I lose my job?
What about if my tenants lose their jobs?
What will happen if the sky falls down?
If you have built a recession proof portfolio then you don’t have too much to worry about.
And as for the sky falling down, we don’t think that will actually happen…
The importance of minimising risk.
Any Binvested client knows that Nathan Birch has not been buying properties recklessly for the last 15 years or so.
After being warned by family and friends of all the disastrous things that could happen, Nathan developed an investment strategy that minimised risk along the way.
This is something that many investors do not do, says Nathan.
“A lot of people just invest in a property and hope that it will go up.”
“They don’t look at the worst case scenario.”
This becomes a problem when they find themselves struggling to make repayments on a vacant property or dealing with a negative cash flow. It becomes even worse if the property goes down in value and they are stuck with a massive mortgage.
And, then, it becomes devastating when they are forced to sell the property for much less than what they bought it for.
Building solid foundations.
“That’s why you need to have your foundations set very well,” says Nathan.
He developed his strategy based on three key principles:
1) Buying below market value
2) Buying with a good upside for capital growth
3) Buying properties that have a strong cash flow.
Buying below market value.
This means you will have a capital buffer if the housing market drops in value.
“You are minimising risk so that if you have to get out, then you can get out relatively unscathed,” says Nathan.
If you have to sell soon after buying the property due to unforeseen personal circumstances, then this buffer will help to cover the closing costs of the sale so that you are not out of pocket.
Buying with an upside for growth.
This will prevent you from buying in an area where there is a lack of demand, says Nathan. It also means you won’t buy in a small regional town based on one industry that would empty out if the industry closed down.
Buying properties that have a strong cash flow.
If you buy properties with a neutral or a positive cash flow then you won’t be out of pocket to cover the ongoing costs.
This is important if you find yourself out of work. If you are negatively gearing a property, the tax benefit is worthless if you aren’t earning an income.
In fact, you would probably need to sell the property quickly – which is not an ideal situation.
With a neutral cash flow property, however, you would be able to hold onto it throughout periods of unemployment as long as it stayed tenanted during these times.
Why Nathan loves bread and butter.
The more affordable types of investment properties, aka bread and butter properties, have always been Nathan’s favourites. He built his foundation portfolio with them for a very simple reason: there will always be demand for affordable housing.
During times of economic difficulty, it may be difficult to find families who can afford to spend $1,000 each week on rent. But, there will always be families looking to minimise costs and live somewhere for $500 or less.
And if renters find themselves unemployed during the GFD, they will find it easier to pay this lower level of rent with Government payments such as rent assistance and unemployment benefits.
Diversifying your portfolio.
“There are multiple markets out there in this country and they get affected differently,” says Nathan.
“Some of my properties that are in Queensland are performing very well at the moment, but the ones in Sydney aren’t doing very well.”
“But, that doesn’t mean that I’ve got to sell them straight away because the prices aren’t the best. I’m just holding onto them because that’s what I do.”
Buying properties in a range of good growth markets helps to reduce risk because it means you aren’t carrying all your eggs in one basket.
Staying strong throughout economic disaster.
Doing all of these things while building your portfolio will help you to weather the storm of an economic recession or depression.
Even if you or your tenants become unemployed, having bread and butter properties that are in good growth locations with strong cash flows means you may still be able to hold onto them.
And, if you do sell when the market is dropping, having bought below market value means you will have a good chance at breaking even at the end of the day.
Even better, if your portfolio is diversified across different markets, the positive performance of certain properties may outweigh the negative performance of others. This keeps your networth position largely unaffected throughout the economic turmoil.
Nathan says he is not being negative when he talks about the GFD.
“I’m just looking at the reality of how things stack up,” he says.
“Volatility is awesome because that’s where weak hands go to strong hands.”
He says, rather than being fearful, it is better to make something out of the situation. He doesn’t want to be stuck in a position where he is exposed. But he equally doesn’t want to be in a position where he can’t take advantage of good opportunities as they arise.