Investment tip: What to do when your strategy goes awry

One of the strategies that gained popularity, particularly during the property boom, is the ‘live off equity’ strategy where investors accumulate multiple properties and draw down on the equity to buy another asset or simply add to their income.

Naturally, this strategy will work best if the properties consistently increase in value.

When the biggest markets across Australia, such as Sydney and Melbourne, started to descend, the investors who depended on their equity suddenly find themselves in a tight spot.

Right Property Group’s Victor Kumar said: “You will probably already know you're in trouble because the bank's already starting to say no. When the markets are turning against you as well, you've got a double whammy happening.”

If this happens, all is not lost as long as you know how to weather the storm.

Some of the options available are selling out your properties or finding another source of income, like driving an Uber or putting your old stuff on sale—anything that could improve your cash flow and, therefore, improve your serviceability.

According to Mr Kumar: “The negative cash flow is the main problem with that strategy of living off the equity. At some point in time, you've got to find the money to buy the loan back, especially if the market is turning against you.”

Moving forward, the property expert strongly recommended more consistent long-term strategies where your properties are not completely reliant on performing well, such as buying in affordable corridors.

The property expert said: “We just prefer the more affordable corridors because it gives us consistency in our portfolio. We're not saying that the affordable properties are the only portion of a portfolio, it's just a really good building base.”

“As you become a more experienced investor, then you can branch out from there. At least you've got a really solid base to fall back on. But we just don't do the blue chip,” he added.

‘Keep it simple’

With the vast number of strategies and techniques that are available to investors, it’s easy to feel overwhelmed when determining which could work best for your portfolio.

Some of these strategies are straightforward while some may require more sophisticated knowledge of property investment and finance.

At the end of the day, there is no one right or wrong strategy, Mr Kumar reminded investors.

“There's a 100 strategies out there that are very very successful. You just have to find one that fits with your risk profile,” he highlighted.

If the strategy seems too difficult to understand and too complicated to implement, then it’s probably not the right strategy for you.

Aside from your risk profile, it’s important that your strategy is also in line with your market knowledge, your current financial situation, your capabilities and limitations as an investor and, most importantly, your end goal.

Mr Kumar said: “If you struggle to understand the concept of investing property, that’s probably a red flag saying, ‘It might not be the right thing to do.’ It should not be complicated.”

“Buy well, hold onto it, make sure you get your rent so it pays off the loan, hold it for a couple of property cycles and wait for the market to work on your side,” he added.

Having said that, Mr Kumar also reminded investors that strategies don’t have to be set in stone.

After all, throughout your wealth-creation journey, you will be encountering changes in the market, in your financial situation and, sometimes, even in your end goal.

In order to navigate the changing investment landscape and the market cycles, the strategies you implement must complement the current movements of the property market without disregarding your personal goals, capabilities and limitations.

According to the property expert: “You need to be adjusting your strategy in line with the market. So if finance gets hard, you need to start to looking more cash flow or stop buying for a little while.”

“If you're just starting to build out your portfolio, you got to start from good fundamental areas and make sure you're looking at the negative cash flow you're going to carry as you’re in the acquisition phase of the portfolio,” he said.

Finally, according to him, simply pay attention to your cash flow.

“You need to actively look at ways of paying it off so you can control the cash flow. All of these credit strategies and the dilemma of which strategy you need will fade away because you're actually controlling the income—that's what investing's all about. You're controlling the income, and you're letting the wealth creation happen in the background,” Mr Kumar concluded.

Tune in to Investing Insights' June episode to find out how the most common property investment strategies will work in today's market.