“What Ifs” & Other Questions For Property Investment
Understanding these points is a must, no family BBQ advice here.
What if interest rates rise?
What if we can’t get a tenant?
What if inflation stays low?
What if property doesn’t grow in value?
What if my tenant damages the property?
What if the tenant does not pay rent
What if the Govt change tax laws?
What if I lose my job?
Can I lose my house?
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What if interest rates rise?
We fully expect interest rates to rise. However, a rise in interest rates will normally take some time and is a result of a growing economy with an increase in inflation. With inflation, we should see an increase in rental income and possibly an increase in base wages. Both of these factors combine to minimise the impact of rise in interest rates on well structured investment properties. In addition to these factors, we recommend that a cash buffer be established through budgeted contributions above your minimum out-of-pocket required contribution. Your report is based on interest rates above current levels and greater than a 3 year fixed rate. When combined with projections that assume low rent, the potential impact of an increase in interest rates should be within your manageable range.
What if we can’t get a tenant?
As a property investor, it would be foolish to expect your property to be perpetually let. We advise all clients that they should expect periods of vacancy. The property managers at AURA are proud of an average vacancy of less than 1%, which equates to less than 1 week per annum. By setting reasonable rental income expectations for high-quality property, periods of vacancy longer than the average should be rare. Once again the cash buffer will help meet any unforeseen or extended vacancy periods. Your report will allow for a $20-50 per week reduction in the current rental.
What if inflation stays low?
This is a very good point, as periods of high property growth are sometimes associated with high inflation. All our projections are based on a growth rate of 2% above inflation. Over the last 40 years, this has proven to be conservative “Real Growth”. We have found that even with low inflation, there have been pockets of property that have well and truly outperformed the averages and have exceeded the 2% benchmark real growth. These pockets are what our Property Selection Team research and identifies. It must also be clear that even growth of 5% on a $450,000 property is $22,500 in one year. Considering the potential for an investment property to cost $20 per week or $1040 per year, this represents a considerable return on the actual funds invested.
What if the property doesn’t grow in value every year?
Once again it is unreasonable to expect any property to grow in value each and every year. In fact the growth might be quite flat for some years and then in periods of high economic growth or increasing demand, the property may experience 10% or 15% over 2-3 years. This is why we suggest do not try to pick the “Property Cycle” but rather take the longer-term view that over any 10 – 15 year term, the property will average a solid real growth above inflation. It is important to be in the market well before any extreme growth. It is equally important to hold your property even when the market is dropping or flat. The long term equates to 10, 15, 20 years, or even longer time frames.
What if my tenant damages the property?
We strongly recommend Tenants & Land Lords Insurance, which covers malicious damage to your property and loss of rent under a wide range of “horror” events.
What if the tenant does not pay the rent?
Again we strongly recommend Tenants & Land Lord Insurance, which covers loss of rent due to damage.
What if the Govt change tax laws?
This has been a regular topic of discussion amongst analysts and experts over the past decades. Current and opinion based on previous experience and statistics is that as property construction, affordable housing and employment flowing from this sector make such a large contribution to the economy and meet fundamental needs of the community, the likelyhood of wholesale changes to the basic principles of gearing to invest in property remains highly unlikely.
What if I lose my job?
With or without an investment property the loss of a regular income can place stress and pressure on a family. That’s why a debt structure with a solid 12 months expense buffer in place should be implemented to ensure that emergencies such as this don’t force the untimely emergency disposal of the investment. A well structured investment should be one that has an “insulation” against this type of variable.
Can I lose my house?
With the correct debt structure and insurances, in place combined with an accurate assessment of capacity, as well as an expense buffer, the exposure of your family home should be reduced to an absolute minimum. Sound advice and guidance from a licensed professional are required to ensure all these components are correctly implemented.
