Real estate cycles come and go, but one fact always remains true – there is no exact science to property investing.
As much as we would like to believe we are able to control every part of the process, the reality is that investing in property is rarely a bump-free journey. However, you can minimise your risks, which includes having clear strategies to help you deal with unexpected situations and setbacks if they arise.
The last place you want to end up is being forced to sell an investment property, (due to financial circumstances) which can often result in a reduced price from a quick or distressed sale. This is where your risk minimisation strategies are important.
Following are some ways of planning for the worst-case scenario, so that if it eventuates, you are never caught off-guard and forced into a position of vulnerability.
When you are in a vulnerable position you are usually extremely stressed, frustrated and desperate to find a solution. You are not clear headed to make positive decisions, and can end up making irrational decisions that are regretted later.
The two biggest fears investors face are not being able to afford the mortgage repayments (due to rent not being paid, the property being vacant or other financial circumstances) and having the tenant damage the property.
If these are the two biggest fears (and you may have others) it is important to come up with a coping strategy for every possible situation that could arise.
You may like to take a moment to write down your fears (this can be a very valuable exercise) as it will help to prepare you for the worst, allowing you to feel a little more in control, expecting the best strategised outcome. Once you know your fears the next step is to develop a risk minimisation strategy. There have been three key identified stress areas: Mortgage repayments, repairs / maintenance and upgrades / renovations.
Your strategy needs to involve establishing a weekly or monthly top up account for each of these key areas to cover unpaid rent, vacancy periods, maintenance and renovations.
You may choose a separate investment bank account or top up your mortgage account. Rule of thumb is to work towards a top up of four to six weeks rent, and six weeks rent for maintenance and renovations for each 12 month period or what fits with your budget.
If you are currently living week to week the top up may be less, but it is important to put a set amount away. You may also like to consider utilising a portion of your tax return towards the top up.
Having this top up account provides peace of mind in knowing that if anything goes wrong, you are less likely to run the risk of losing the investment property and reduce stress in maintaining the property.
As your managing agent our focus is always to minimise financial loss and property damage through careful tenant selection processes, routine inspections and constant follow-up and monitoring during the tenancy, but there is always the chance of an unexpected employment loss for the tenant or the unexpected of a new relationship or friendships with the tenant that can change from the outset when the tenant moved into the property.
Landlord Protection Insurance is also a great product to assist landlords recover out of pocket rent and expenses and is a tax-deduction.