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4 steps to finding good investments in a downturn market

4 steps to finding good investments in a downturn market

by Bianca Dabu | March 18, 2019 | 1 minute read

‘Be fearful when others are greedy and greedy when others are fearful’, according to world-renowned investor Warren Buffett. How can investors apply this mantra in the current softening markets across Australia?

March 18, 2019

Simply put, Mr Buffett advised investors to take advantage of the opportunities that present themselves when people start to retreat from the market for fear of suffering a loss due to price declines.

On the other hand, when most people are eager to buy the next asset they see, the better option for smart investors might be to buck the trend and sit on their portfolio for a while.

According to Keshab Chartered Accountant’s Munzurul Khan: “When there’s optimism without a lot of logic behind it, that's the time that one needs to be rather careful. Perception of the market and the reality of it are often very different.”

“Very often, when the perception is that the market is doing exceptionally well, the reality is that the market is getting a little bit overrated. On the other hand, when the perception is that there’s just so much doom and gloom, the reality is that it’s arguably a good time to find fantastic deals, as long as there is enough level of knowledge and understanding on the fundamentals of property investment.”

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At the moment, with investment activity declining in Sydney and Melbourne as their property markets enter the softening phase, Mr Khan believes that the capital cities could be holding unique opportunities for investors implementing the right strategies.

While investing in downturn markets naturally have risks, the accountant said that making the right purchase comes down to the asset’s value.

He enumerates three simple steps to determine the best investments amid a shifting property market:

1. Consider net yield position or cash flow potential

According to Mr Khan: “Any asset has to have an income or net yield position. Think about how much the asset could provide in terms of cash flow.”

While compounding growth is undeniably important for creating wealth over time, cash flow always come in handy for maintaining the asset, particularly when prices are declining. With enough cash flow and safety buffer, the investor could ride the waves and ultimately thrive long enough to see the market recovering.

“We still need cash flow to be able to maintain the property. If we can't maintain it, the whole thing comes down like a house of cards.”

As such, Mr Khan advised investors to pay attention to the the property’s potential for rental yield in order to maintain good cash flow and establish strong cash buffers for risk mitigation.

2. Look into ‘manufactured growth’ potential

While investors can achieve natural growth from rental yield, they can also manufacture growth by selecting properties with add-value potential, such as bigger land that can be subdivided or properties that can accommodate a duplex or a granny flat.

“It doesn’t necessarily mean that we have to have it, but just having that option that we can subdivide it, that by itself is a value proposition.”

“If one buys the property with the cash flow and some level of manufactured growth potential, then there’s growth that can be achieved and growth that can be created,” Mr Khan highlighted.

3. Understand macroeconomic influences

Apart from knowing the wealth-creation potential of a property, Mr Khan also advised investors to understand the macroeconomic factors that could influence the growth of their portfolio.

In particular, new and existing infrastructure can significantly affect the value of a property in the long-term, so being aware of the infrastructure in and around the area, as well as those set to be built in the coming years, will give investors an idea of how their asset could grow.

The accountant said: “You look into the infrastructure. What’s happening? If we’ve got a new train station came in, we’ve got a new university happening in there, we naturally expect that there’ll be more population. If there is more population, there is more demand for property.”

Investors are also encouraged to get familiar with policies and processes as well as the influences on the decision-making of the local government and councils.

With an educated view of the future, investors can gauge the long-term growth potential of the area and, ultimately, their property.

4. Identify goals and strategies

Finally, Mr Khan reminded investors to consider their individual circumstances before jumping into any investment opportunity, especially in a downturn market where there could be more risks.

According to him: “Are you going to get a pay rise soon? Are you going to go from two incomes to one income? Is your baby on the way? Are you looking to retire? Is there any other stresses or strains in your life? Could you be bothered to go through the processes?”

Being able to determine their capabilities and limitations as investors can not only help them identify the right property, but it can also assist investors in formulating strategies fit for the current market and their personal circumstances.

“Yes, we got the cash, the manufactured growth and the macroeconomic factors in place, but are my properties in one area only? Do I need to diversify to improve cash flow?”

“The definition of value becomes two-fold. There is a general definition of value based on what we genuinely [see], then there’s the one specific to your personalised value proposition. There could be value in one area, but if you’ve got so much investment in there, well, you don’t want to have all your eggs in one basket.”

“You could be getting returns that are slightly lower in another area, but in the longer period of time, it would do much better with the rest of the assets in your portfolio,” Mr Khan said.

At the end of the day, the goal is grow their portfolio without overcapitalising and ultimately thrive amid current market movements.

 

Tune in to Munzurul Khan's episode on The Smart Property Investment Show to know more about the strategies that will help investors succeed in the property market this 2019.

 

4 steps to finding good investments in a downturn market
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