Changing economic conditions a crisis for unprepared investors

“Property investors who have made their investment decisions on conditions that have prevailed in recent years could well find they are financially overstretched if the residential property environment changes in the way economists are predicting,” Mr Hutton said.

“Geared investors should always have a medium-term cash flow plan that covers likely events, as well as unforeseen circumstances, such as tax changes like those announced in this year’s federal budget.

“For instance, what happens to their ability to service debt if interest rates rise? What happens if a property remains untenanted for an extended period? How will the changes to the depreciation rules affect cash flow?”

For those with heavily geared properties, Mr Hutton recommended investors should have multiple cash flow options to mitigate any changed circumstances.

“History tells us that the story of property crashes, large and small, is always much the same. It’s not a reduction in value of property or a downturn of property sales or construction that causes investors to lose assets. These are simply influences or by-products,” he said.

“The reason people lose their property portfolio is usually an inability to service debt, resulting in them losing control of their properties.

“Investors who can hang on in the rough times almost always come out smiling when conditions bounce back again.”

In order to survive those rough times, Mr Hutton said investors need to know the difference between cash flow (the net amount of cash flowing in and out), paper wealth (total wealth with a monetary value) and expected income (the estimated amount of income received).

“For many residential property investors, understanding cash flow and making sure that debt can be serviced throughout any property downturn and interest rate increases, is likely to be the difference between financial success and failure over the longer term,” Mr Hutton said.

“The current outlook also suggests it is not the time for investors to be overstretching themselves.”