Amid fluctuations across property markets, Keshab Chartered Accountant’s Munzurul Khan has identified steps to navigate the ever-changing landscape and ultimately succeed in the long-term game of property investment.
According to the accountant, cash flow and risk mitigation will be the most important keys to surviving softening markets.
In the case of Smart Property Investment’s Phil Tarrant, his 17-property portfolio consists of assets in NSW, Queensland and Victoria, which allowed him to maintain the balance in his portfolio despite the recent declines in Sydney and Melbourne.
While he achieved growth in Sydney and Melbourne during the past property boom, his Brisbane properties provided the cash flow to support the portfolio after the two big markets reached their peaks.
Moreover, Mr Tarrant has made it a point to avoid buying properties solely for tax purposes.
Mr Khan said: “If there is a bit of tax benefit, we take a bit of tax benefit, but it’s not a primary reason we bought the properties that we bought. As an example, we haven’t bought anything which is off-the-plan.”
“It’s your mom-and-dad day-to-day properties that we buy.”
Moving forward, Mr Khan and Mr Tarrant, along with the rest of their investment team, are looking to ensure that their portfolio will remain afloat amid uncertainties in the current market.
Through it all, they plan to maintain a long-term view in order to make the most out of their existing assets as well as the opportunities that could be presented to them along the way.
“This is the year of a lot of uncertainties. We don’t know what will happen in terms of macroeconomics and the politics, what will happen with the royal commission. We don’t know, but while there is uncertainty, we go steady because property Investment is not for a short period of time.”
“We're looking to consolidate and that’s okay. We don’t need to buy every year.”
“We’re still maintaining the cash flow side of it and we will never say no to action but there has to be very genuine, valid reason. Only then can we take some action. Otherwise, we just have to stay on the sides,” Mr Khan highlighted.
To mitigate negative pressure on cash flow even without purchasing new assets as an additional income stream, the team is currently working towards locking in fixed rates on several of their home loans.
At the end of the day, their goal is to be able to establish and maintain a strong cash flow and a significant buffer so they could retain the ability to hold the 17-property portfolio, ‘ride out the waves’ and come back stronger once the markets have recovered.
After all, “you only potentially make a loss in property if you are forced to sell”, Mr Tarrant said.
“It's okay not to do anything. We’re keeping our powder dry and we will wait until the markets unveil what it’s going to look like within the next six to 12 months.”
“Once we get there, we’re ready because we maintain our capacity to borrow, we have our finances in order. Basically, we’re in a position of power and strength to be responsive to the market and to capitalise on that market.”
According to Mr Khan, if history is any indication, the current market will eventually rise from stagnation and experience another period of spectacular growth—something that investors should be prepared to take advantage of when the time comes.
“Whether it’s four, five, six years or so of stagnated markets, the cycle tends to move forward to around two to three years of absolutely silly growth. When you average all of those out, historically, we have a reasonable level of return, from 7 to 10 per cent,” the accountant said.
Apart from cash flow and consolidation, Mr Tarrant and his team also considers ‘long-term land banking’ as part of their strategy in the near future.
Essentially, this strategy will focus on acquiring fewer but larger assets with greater value, taking advantage of existing ‘planning and land dynamics’ and the possibility or rezoning in order to cater to the growing dwelling demand, particularly in and around city centres.
While land banking could be a big gamble, it’s usually deemed a lucrative strategy for the long-term.
Mr Khan said: “The growth is on the land and, because financing is very difficult at the moment, we just don’t have that much competition.”
“We’ll look into infrastructure, whether there are nearby airports that are coming through, whether they are long-term infrastructure projects. And equally important is that we maintain cash flow that will allow us to hold on to the land.”