Property market cycles mean that a slow down is inevitable so making sure you guard against them from the outset is the way to mitigate financial risk.
Many new investors who’ve been buoyed by strong capital growth and low interest rates in recent years have entered the property market and are seemingly unprepared for a market slow down and may find themselves in trouble.
As a long term investment proposition, property follows a cycle that must be understood and the risks mitigated against in order for investors to weather any future storm.
For those who are new to property investment, congratulations! Most think that their future path is certain and you’re set for future wealth, just as I believed when I first started investing.
Over the past two decades, however, I’ve realised the need to take a strategic approach. With that knowledge at hand, these are the ways to survive a property market slow down.
1. Understand how the property cycle works
The length of a property cycle can not be predicted as there are many factors that contribute to the time between each market peak and trough. Infrastructure spending, population movements around the country and employment hubs can significantly impact the time the market takes to complete it’s cycle.
Interestingly, each new cycle peak is higher than the previous peak. We know this as fact by tracking sales results across the decades.
2. Accept the property cycle’s movements
It’s vital to understand that the downward trend of the property cycle is normal and may last several years (as we’ve seen in the Perth market). This downward movement can be mitigated against by having a cash buffer in place from the very start to help through times of tight cash flow. Remember, the worst time to sell a property is at the bottom of the cycle.
3. Be pragmatic about lower yields
Sometimes you may need to accept that a lower rent (even a much lower rent ) is better than receiving nothing at all. This is the best way to manage a downward moving rent cycle – meet the market.
4. Diversify your property portfolio
Make sure that your property portfolio is spread across several states, so that if one experiences a downturn your other properties can carry the underperforming ones. This is also true for holding a number of different property types in different areas throughout each state.
5. What you Buy and when you Buy are paramount
Along with diversification, it’s strategic to buy properties that are cash flow positive because they will likely weather a downturn better than most. Buying an investment property at the bottom of the cycle for a discounted price means that when the downturn hits, you are already positioned to hold onto your assets because you have bought under market value.
If a property is already costing you money to hold when a downturn hits, that situation might be the tipping point and the need to sell your asset at a loss.
6. Buy to hold: capital gains benefits
Hold on to all your assets as best you can, because when the market recovers and valuations trend upwards again, there’s more equity to be gained at the top of the next market peak. Property investing really is a long term play – at least 10 and preferably 20+ years.
What many people fail to understand at the beginning of their investment careers is that downturns are all part of the normal property cycle.
It’s often only a matter of time before one could strike your portfolio and the only way to guard against exposure is by being prepared.
Those that best weather property market cycles usually have access to quality advice. Relying on the expertise of those who have created successful property portfolios is paramount to you achieving your own investment goals and mitigating risk.