The beauty of property investment is you don’t need to be a millionaire to get started. However, investors do need financial stability to hold and expand their portfolios. When that stability is lost, investors may find themselves in dire straits.
Philippe Brach from Multifocus Properties & Finance says investors suffering from financial hardship are usually going through illness, unemployment or divorce. In his experience, divorce is the most common issue and the most likely to wipe out a portfolio.
“They don’t have the cash to give the other side so they have to sell everything and share the money,” he says.
While these events can be devastating, the right tactics may help you come out the other side with your portfolio intact.
You have to change your mindset and forget about what's happened, because you can't do anything about that
No one likes to imagine losing their income, their health or their marriage. Yet thinking about the possibility before it happens is the only way to protect your financial security.
Brendan Kelly from RESULTS Mentoring urges investors to have money on hand for emergencies. One option is to establish a secured line of credit against your home or another property.
“If you're able to establish a line of credit against your own house or the houses you have, then you can continue to service debt on your other properties,” he says.
While using credit will add to an investor’s debt burden, he sees this solution as a way to buy time.
“If you've got a $50,000 line of credit and you're chewing up $2,000 a month, you've got 24 months. You can probably solve the problem by then,” he says.
However, investors need to put this facility in place before their income dries up. “You're not going to get a line of credit after you've lost your job,” Mr Kelly says.
That said, a line of credit may not be a wise choice for all people. According to Kevin Lee from Smart Property Adviser, many investors end up using their credit facility on frivolous or non-essential expenses.
“I don't recommend this for average people unless they are super disciplined and they don't use those funds for any other reason than an emergency,” he says.
As an alternative, he urges investors to put away $5,000 for every property they own in a ‘rainy day’ fund. To avoid temptation, investors could consider getting a second signatory on the account, he says.
Though both these measures are merely stop-gaps, Mr Brach believes having an emergency fund can give you a chance to regroup.
“If you plan ahead by having a buffer, that will allow you to make decisions in a composed manner, without having a panic attack,” he says.
Another consideration is insurance. Mr Lee is a strong believer in being fully insured, including income protection, permanent disability and trauma insurance.
“Income replacement insurance is fully tax deductible and in my opinion is an absolute necessity for anyone who has debt,” he says.
As for divorce, even happily coupled-up investors should have a conversation about their finances in the event of a break-up, Mr Kelly believes. This is particularly important where one partner is more active in investment than the other.
“Make sure the appropriate company trust structures are in place, the ownerships are clear and pre-nuptial or even post-nuptials financial agreements are sorted and put in place,” he says.
You're not going to get a line of credit after you've lost your job
In a crisis, all the experts agree that there is one golden rule: don’t panic. What you do next depends heavily on your portfolio and the surrounding circumstances.
If the properties are positively or neutrally geared, a loss of income should not have a major impact, Mr Lee says.
“If your portfolio is self-funding, it will just be business as usual for that investment strategy because someone else is paying for it. As long as you have a tenant, you don't have a problem,” he says.
However, where the properties are negatively geared, the outlook is more worrying. Mr Brach says investors should start by assessing the severity of their situation. Most people who lose their job are likely to find new employment within a month or two, he believes.
“Selling off a portfolio of properties takes time, so you have to be really sure you have no hope of resurrecting your finances before you go down that route,” he says.
The first step Mr Lee would take is switching any principal and interest loans to interest only.
“If you can't cover your interest on the loan, you either need to get new work or reduce your repayments in some way, shape or form,” he says.
Mr Kelly also suggests investors consider ways to boost their rental returns, either by doing inexpensive renovations or renting the property out room by room.
If there is no hope of improving your financial position, and you have no income protection or emergency fund, the only option might be to sell up. Mr Brach suggests investors take their time to plan out a strategy for liquidating assets.
“It doesn’t have to be a fire sale. You take your time and obviously recover as much as you can from those sales,” he says.
In some cases, it might be best to offload the property with the greatest amount of equity first.
“If you sell the one with the most equity, that might help support the other ones. Sell the one which will put the most cash in your pocket to take that sense of panic away,” Mr Brach says.
On the flipside, Mr Kelly would conduct a thorough market analysis and then cut the worst-performing property.
“You don't want to sell your best performers because they're the ones who are going to be the best ones for you in the future,” he says.
When investors are unable to service their loans, Mr Kelly recommends communicating honestly with the banks. If investors are selling up and settling their debts, the banks may choose not to interfere.
“The banks don't want the bad press but they don't want to lose money either. If the easiest way is for you to sell, they'll say go and do it,” he says.
However, Mr Lee is skeptical of this approach, suggesting investors do their best to fly under the bank’s radar.
“The last thing you want to do is flag to a bank that you're out of work, because they then put you in their high risk or recovery area,” he says.
In cases of divorce, the fate of your portfolio might be out of your hands. Unless couples can reach an amicable settlement, the courts may decide how assets are split up. Mr Kelly suggests investors try to come to an agreement with their spouse that requires few, if any, properties to be sold.
“If it's a legal battle, it might be years before you get your hands on your assets and you may in fact lose the lot,” he warns.
If your portfolio is self-funding, it will just be business as usual for that investment strategy
When an investor loses everything, starting again can seem impossible. In Mr Brach’s view, it’s best to begin slowly.
“You’re in rebuilding mode. That means you find a job, you get your finances up and running and you start fresh as a new investor,” he says.
Mr Kelly encourages investors not to lose confidence in their abilities.
“You haven't made a bad investment decision. There are issues outside of your investment activity that caused the problem. Under those circumstances, it's not too big of a leap to get back on the horse,” he says.
However, he emphasises the importance of being emotionally ready before diving in again.
“If you're not well, under any circumstances, I am not a fan of investing. You're going to make bad buying decisions,” he says.
Some investors may find it helpful to work with a mentor or a joint venture partner.
“Get somebody who can support you who knows what you're up to or who has similar experience so they can back your decisions and talk you through it,” he suggests.
Mr Lee believes attitude is the major stumbling block for investors trying to get back in the game.
“You have to change your mindset and forget about what's happened, because you can't do anything about that,” he says.
“You draw a line in the sand and ask ‘what did I learn so I don't ever go through that again?’”