Investing Without Fear

Investing without fear

The most common factor from both novice and experienced property investors is that most investors experience fear at some point or another.
Fear usually stems from concern about the unknown – in the case of the inexperienced investor fear of the unknown may even result in novice investors not investing at all.
To overcome the fear of starting on your investment journey, getting an education from people who are investors themselves is the fastest way. Don’t discuss your fears with non-investors; go to those “in the know”. We all know that our friends and family mean well, but in your early days of investing, it can be beneficial to only share it with people who know and understand what you’re trying to achieve.

Identifying Risks

Risk is another word for fear. Below are some of the most common risks/fears that property investors experience, and the strategies that can be applied to mitigate them:

1) Risk/Fear: increasing your debt level and not being able to pay it off
Bad debt is generally categorised as high depreciating, non-income producing items such as cars, clothes or just having a good time. Good debt, on the other hand, is used to purchase income-producing assets such as investment properties. The income from these assets is used to pay the mortgage payments and expenses. Once the conceptual difference between good and bad debt is understood, increasing the good debt becomes much less of an issue!

2) Risk. Fear: supporting an investment property if you lose your job
There are many things to consider when investing into property but, as a priority, before getting into the investment market, you will need to decide whether you are considering a positive or negatively geared property. Based on which approach you take, there are different strategies to cover yourself should you lose your job. You need a ‘rainy day’ reserve fund, and there are a couple of options:

Positive cash flow property
A positively geared property is one where your rental income exceeds the mortgage payments and property expenses. Direct the excess into your offset account and hold it there as your ‘rainy day account’. If you lose your job, the cash flow covers all expenses in this scenario so reduces the risk of not being able to pay the mortgage and other expenses.

Negative cash flow property
A negatively geared property in a nutshell is when the mortgage needs ‘topping up’ from your income. Your property deductions /out of pocket expenses may help you to secure a tax refund at the end of the financial year. Save your tax refund as a buffer. In a couple of years, you’ll likely have enough ‘buffer’ to use for a deposit on another property.
Don’t forget – at most your risk will be limited to the shortfall needed from your income, not the entire mortgage and expenses repayment.

3) Risk/Fear: not securing a tenant
Having a vacant property is one of the most common risks that investors talk about. There are a couple of ways to mitigate this risk;
– Only buy properties in high rental areas where the vacancy rate is consistently less than 3%.
– Begin looking for a property manager early in the purchasing process. Interview and select the property manager before you settle. Your real estate agent will be able to keep an eye out for tenants before you even have the property in your name! Finding a good property manager early can help to lower the risk of experiencing a long vacancy period.

4) Risk/Fear: bad tenants
How do you pay the mortgage if the tenants don’t pay their rent? Or pay for repairs for damage caused if they “do a runner”? It could possibly take weeks or even months to repair the damage, during which time you may not be able to rent the property until it is once again habitable. The answer ‘landlord’s insurance’. This insurance protects the landlord from bad tenants and the cost of this insurance is minimal when you consider the cost of not having it, and it is tax deductible as well. It is just not worth the risk of not having it. By having landlord’s insurance, the risk of tenants defaulting on their rent or destroying the property is no longer high, as the insurance policy will kick-in to cover those costs should the need arise.

5) Risk/Fear: interest rate increases
We have no control over changes to interest rates, including if and when the Reserve Bank of Australia (RBA) increases or decreases them. (Also these days, whether our lender chooses to increase or decrease rates independent of the RBA).

We are currently experiencing a housing shortage, which means the demand for rentals is high. As part of your risk mitigation strategy, you may want to consider increasing the rent, and allow a little extra to ensure that you can afford to keep it today and tomorrow should rates go up. Interest rates are a fact of life and if you’re going to invest in property, allow for increases and only purchase property that you can afford to hold onto. After all, it’s no fun living off baked beans and rice crackers while trying to get rich. The finance lender usually takes in to account a few interest rate rises when establishing your serviceability of the loan you are applying for as a buffer anyway.

Exit or Parachute Strategy

An exit strategy is your ‘pull the pin’ plan. It is best to put this plan together in the cool light of day, before you buy, because doing it under pressure can lead to the wrong decision. An exit strategy will protect your overall investment plan and give you peace of mind.

The biggest breakthrough you can have in property investing is in your mindset. Worry less about things that really don’t matter because a good risk mitigation strategy will allow you to sleep at night without fear.

I hope this helps many and is open to further contributions from others in the forum.