Property Investors — Prepare for the ‘What If’ Scenarios low

As Australians we love investing in property. We know it’s potential, but I’m here to talk about the things that can cause your portfolio to blow up. Right now, people are borrowing more than ever to get into this booming market. They’re swimming in deep water but haven’t got their floaties to save them if they get a cramp. When in deep water, a financial planner becomes your lifeguard to help you plan for those ‘What If’ scenarios we don’t want to think about.

‘What if’ scenario’s come in many shapes and sizes… What if rates go up? What if your Interest Only loan goes to Principal and Interest? What if you’re left without a tenant? What if you need to spend loads on capital works? What if you’re not earning an income? Basically, it’s the events that demand more cash from your back pocket and can cause massive ramifications to your portfolio.

In my opinion, the people who are at the biggest risk are those who have been lured down the track of negative gearing or who have as much debt as the banks will let them have. Don’t get me wrong, I like negative gearing and I like debt, but only if they are used in the right way!

I see one of the biggest current threats being Interest Only loans becoming Principal and Interest loans. You see, banks aren’t allowed to have as many interest only investment loans on their books as they used to. This can quite easily affect your average property investor. ‘What If’ you are forced to move into a principal and interest loan? In the best case scenario your repayments might go from 4% to 7% per annum. This means that on a $500,000 loan, this increases your repayment from $20,000 to $35,000 every year. Are you prepared to bear the extra costs of $15,000? If you can’t, you better borrow some more money or start selling things.

There’s many ‘What If’ Scenario’s to identify and prepare for

As a financial planner I look to identify the events that might cause a catastrophe and create plans around them, while still maximising an investors potential for wealth creation. Here are 5 simple tips to help prepare for those ‘What If’ scenarios:

1. Have a cash buffer prepared. Managing offset accounts correctly can really save you from a spot of bother.

2. Start a flexible investment portfolio. This portfolio could include shares, managed funds or term deposits that can generally be sold down quickly and easily to fund any hard times.

3. Continually stress test your portfolio. We use calculations and models to predict what scenarios may put you under stress and then actively plan around them.

4. Stay on top of regulatory changes. The government and APRA love making things harder and harder for investors. Keeping your knowledge up to date can keep you ahead of the curve and out of danger.

5. Continually reassess your strategy. As your scenario, goals and objectives change, so should your strategy.

I work with young professionals and business owners on managing all of their financial affairs and assist in growing their wealth. To find out more information, see our Young Millionaires Club page.