Practical advice for property investing in 2016
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.
- Now is not the time to get drunk on highly leveraged purchases. You should hopefully have your overall loan-to-value ratio down below 70% at this point in the cycle.
- Focus on improving cash flow. Increase your rents. Review your portfolio and consider selling your worst performing properties. That might also free you up to buy a better property without taking unnecessary risk. I’m surprised the number of people who don’t sell under-performing properties and still want to leverage up in this market.
- Cash is critical; so make sure you have access to a decent cash reserve. Also try and keep your revolving credit away from the bank you have most of your rentals with. It is a 1-year renewing facility that can trigger a review at any time. Be particularly careful if you are Business managed, as your RM has to conduct an annual review regardless.
- Have at least two banks in the mix and possibly a third for your home.
- If you can’t get your home debt-free consider having one property at a minnow lender (SBS, TSB, Cooperative, Sovereign) so you are guaranteed access to the equity should you sell it.
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.