It isn’t always easy to release equity when selling property. I had a client recently who intended to sell a property and retain the equity. It was needed to cover the cost of resource consent for another property he wanted to develop into town houses. But the bank was uncomfortable with his overall level of borrowing and took all of the sale proceeds. My client wasn’t in a position to talk about his development yet.
I’ve written about this a number of times on my blog, but it really needs to be emphasized again and again. Leverage combined with lack of cash flow is the biggest risk for investors and it materializes quickly. When an owner sells a property the bank can review your overall financial situation and take the full sales proceeds.
You can have millions in paper wealth tied up in property, and it can disappear if you end up having to sell your portfolio when the market turns. The trigger is when you run out of cash.
I saw that firsthand in 2009 when investors heavily exposed to provincial cities like Rotorua started to suffer cash flow issues from tenants missing rent payments (high unemployment). There are those out there who keep jumping on the adage that property never goes down and we seem to be in boom talk again. Most of them have something to gain and will highlight facts that suit their argument – shortage of housing, unitary plan, immigration, and cash out of China. The Chinese property market is in a massive bubble. Property prices are 30 times income compared to about 9 times here. When (not if) it bursts we will feel the impact here.
2016 is the right time to spring clean your portfolio and get everything in order. You can continue to look at opportunities, but assess them carefully and make sure you have your downside risks properly covered.