Building a property portfolio to withstand a financial crisis
It sounds like we're in for some interesting times in property over the next year or two. While this may be worrying for some, it is possible to design a portfolio that can weather the storms.
Here are four tips:
1. Correct asset selection
You must only own investment-grade properties - the type of property that will be in continuous strong demand by a wide demographic of owner-occupiers and one that is situated in the big capital cities of Australia, because these locations are underpinned by multiple pillars of economic support.
If you own the right type of property in the right location, it is likely to be less volatile in difficult times.
As your portfolio grows it makes sense to own properties in various states, so that when one market is flat, you'll benefit from the growth of your properties in another state.
3. Have a financial buffer
Rather than gearing to the max, build an emergency financial buffer to buy yourself time to ride through the storms.
One strategy I recommend is not paying down your mortgage.
Instead take an interest-only loan and place the funds you'd use to pay down your mortgage into an offset account.
This will have the same net effect on your interest payments, but you'll have access to your funds. Of course, interest-only loans are harder to get these days so this may not be an option.
Maybe it's time to think about establishing a line of credit (LOC) using your existing equity.
In fact, I would go so far as to suggest that you should draw as much equity as your bank will allow, and stash all of it away as a cash flow buffer.
It will give you stability, regardless of the ups and downs of world markets and local bank's funding vagaries.
4. Build a buffer or buy a bargain
The other beauty of being financially prepared is that when everyone else puts the brakes on and competition in the housing markets dries up, you will be in a position to nab the bargain-priced opportunities that abound, by using some of your LOC or the funds in your offset account as a deposit on your next property investment.
Remember - you need to be proactive with your financial strategy and be in control of your situation before things turn sour.
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