While there’s nothing you can do to change the current economic climate, there are plenty of measures that you can take to plan your next move while the rest of the pack hold back. Robin Christie investigates.
If you believed all of the headlines about the world’s economic doom and gloom, and how Canada will be the next country to catch an economic cold as the sneezes come in from the U.S. and Europe, it might be enough to see you sell your portfolio and stuff the cash under the mattress.
But don’t panic. While others run for cover, now is the time to take a step back, look at the lucky country’s economic fundamentals and start taking those smart steps that can set you up for big profits down the line.
1. Exert your buyer power
The current economic climate presents the ideal time to exercise some buyer power. This kind of opportunity doesn’t come around every day. That is, to negotiate hard and buy your selected property at below market value, to stay well within your budget and – if you’ve chosen well – to hold for capital growth in the long run.
And don’t be fooled by all the talk of a falling Canadian property market. Yes, some areas may be experiencing a drop in median prices, but it’s important not to tar all markets with the same brush.
The key is to identify those markets that are set for growth and jump in while the majority of buyers are running for cover.
2. Focus on fundamentals
Sticking to the fundamentals will always serve you well while the majority of the buying community loses its cool. Location is key; with proximity to work, infrastructure, cafes, restaurants, hospitals and educational establishments all being major drawcards.
Even during quiet times, a property that ticks all the right boxes will be popular with both tenants and owner-occupiers.
You want to appeal to the whole spectrum. Not that you’re going to be selling in the short term, but if you needed to offload a particular property and it’s got all the right ingredients, even in a poor market it’s still going to be sought after, especially when it’s the right property on the right street.
Properties in blue-chip locations tend to go at a premium price when the market’s strong, but it’s times like these that offer the canny buyer the opportunity to pick up a slice of prime real estate for a more achievable market value.
3. Look for areas that can weather any downturn
Fundamentals such as population growth and infrastructure spending are the “big kickers” that can make major changes to an area and create a big demand for property. And many of these big kicker areas also offer affordable prices – creating a something of a “double whammy.”
Before you select an area, it’s vital to inquire how the city council intends to facilitate growth in this area, as new residents won’t stick around and enter the property market if their local area fails to provide the facilities that they require. Here are some key questions to ask the council in your target area to find out whether they’re up to the task:
• What kind of economic development programs are in place to encourage economic growth?
• In what way are you facilitating population growth?
• What services are you providing to ensure that you have a broad demographic mix (which is crucial for economic development)?
• In what way are you addressing the typical issues that many councils have with their development application process?
• Are you involved in master planning?
• What are your major infrastructure projects?
4. Boost your buffer
But don’t rush in just because there are some promising buyer’s markets out there. In a slow market it’s more important than ever to make sure that your financial safeguards are in place. As a general rule, you should have a year’s worth of your cash flow shortfall in reserve.
If you’re shelling out $200 out of your own pocket to hold a property, for example, your contingency fund is going to be in the region of $10,400.
You should also include a comparable buffer for each property that’s positively geared. If you’re looking at around a $10,000 buffer per negatively geared property for example, set aside the same amount for any properties that are in positive territory.
5. Reduce that loan
It’s a wise move to have this buffer fund working towards reducing your mortgages, whether it be sitting in equity or in an offset account. But make sure that you’re still able to access those funds if need be.
It’s money that you can get your hands on if something happens to one of your investments, or if you were to lose your job and you needed to find that $1,000 a week out of your pocket to sustain the properties until you find another one.
Consider putting as much money as you can afford towards reducing that debt and increasing your equity levels, and (WHO?) recommends that investors use this strategy regardless of the economic climate.
If you’re reducing the principal you want to do it in such a way that you can draw back the extra repayments if you need to.
With a reduced loan comes reduced risk, but – provided you’ve set your finances up accordingly – this strategy will also allow you to put your equity towards expanding your portfolio.
6. Know when to sell
While conventional property-investing wisdom suggests that selling is a big no-no, sometimes it is worth liquidating a poorly performing asset to put your hard-earned cash towards a more profitable investment.
But weigh up the costs of selling against the expected gains that come with investing in a better property.
First of all, work out how much your existing property will increase in value by over the next few years if it grows at the rate that you expect it to.
Secondly, work out what the outcome would be if you sold and reinvested in a different area – incorporating all selling and buying costs into your sums.
For example, if you’ve got a $500,000 property in a non-performing area, but after the selling costs and the rebuying you might swap that for a $450,000 place in a better area. Will that $450,000 place grow quicker than the $500,000 property in the bad area?
There are three scenarios in which you may consider selling.
Scenario 1: To stop the loss
If you are lumbered with a property in an area that’s performing so poorly that its mid- to long-term prospects are dire enough, consider cutting your losses.
While it might hurt to sell up and take a loss in the short term, you can prevent that loss from compounding by selling up and reinvesting in a better property.
Scenario 2: To expand your portfolio
The second circumstance is if your property has had its growth spurt, it’s now plodding along and – crucially – that keeping hold of it is preventing you from buying elsewhere.
If the bank won’t lend anymore because you’re overexposed, or if you don’t have enough equity because it’s all tied up in a property that’s done really well, then it could be time to take your profit and pour it into something that’s going to have a better prognosis in the coming five years.
Scenario 3: To increase cash flow
Finally, if holding on to a property is putting major stress on your cash flow situation, then it may be time to sell up and allow your blood pressure to get back to normal.
It could be costing you money out of your pocket every week, which is even preventing you from making extra repayments into your own mortgage and stressing you financially.
Bear in mind, however, that property investing is a long game. So, if you have a property that’s not performing as well as you hoped that it would, but holding on to it isn’t hitting you hard in the back pocket, then sometimes the best strategy is to stick with it until the market picks up.
In some cases you’ll make more money by doing nothing. In other words, sit on your hands and let time take effect – maybe you just need to sit on your property for a couple of years.
If you really do have to sell up, then consider finding a joint-venture partner to buy a percentage of the property from you – rather than losing it in its entirety.
If you sell 50% of the property, for example, you halve your expenses but can still benefit from half of the property’s capital growth down the line.
7. Boost the yield
In quiet times you may also want to consider boosting the rent on your existing properties. Adding an air-conditioner, dishwasher, or a lick of paint for example can increase your property’s rent-ability.
Yes it’s an expense that you have upfront, but then you can also increase the rent.
Of course, you’ll need to do your sums to make sure that you’ll make a profit in the long run. If an upfront $700 spent on a dishwasher boosts the rent by $20 a week, for example, then the increase in the rent has paid it off within 35 weeks.
Include those extra 17 weeks and, by the end of the year, you’ll have paid for the dishwasher and will be $340 better off.
A word of warning
During uncertain times, you may be better off pumping your spare cash into your mortgage, rather than splashing out on improvements to the property.
In a period of time when the economy is volatile, people typically don’t pay more for better accommodation. They look for the cheapest accommodation that they can get, and they make do.
However it’s of primary importance that your property is at least in a rentable state during such times. So if the state of your property is driving tenants away, you’ll need to open the purse strings to bring it up to a marketable state.
This story from the CRE/CREW archives appeared in the November 2011 issue of the magazine.
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