G'day Everyone,
This is my first post on this forum so I do apologize if this isn't the best place to post the discussion.
I have recently completed reading Steve McKnight's 0 – 130 properties in 3.5 years, and whilst I thought this was an extremely interesting book, I started to wonder how Steve (and others) manage the risk of having a property portfolio being so large? I specifically ask this question because as a young and new investor (with limited income), I have decided to enter the market by using the buy and hold strategy – just to get a feel of the market in general. However, I just see a lot of risk involved with holding down 130 tenants, lol what happens if i cant get 10-15% of my portfolio rented at some stage? Is there some kind of insurance out there that covers the costs of loan repayments etc? Is there some little trick I should know about getting tenants and keeping them? Is there anyway to cover this risk or do I just have to make sure I have the spare funds encase this happens…
Do any of you have any safe guards in place?
Cheers for the advice
Hi there,
I like to see it as bunch of Gazelles traveling in a pack as opposed to one gazelle traveling by itself. If the pack gets attacked by a lion and one gazelle dies, it does not really matter as there are many others in the herd to breed and keep going. If there is only one gazelle and gets attacked by a lion, ……….
How does this translates to property, simple: if you have one property and the tenant leaves or any other problem arises, you only have one source of income (you become the lonely gazelle), however if you have 130 properties and 1, 2 or 5 tenants leave, you have the other 125 properties to support your portfolio. Hope this makes sense.
The more good performing properties you have, the easier it gets.
Happy Investing
When you start off, all the numbers are mind-boggling; levels of debt, numbers of tenants etc.
As you progress, it all becomes just numbers and equations. The important things to worry about are equations.
For example; if you have 10 properties, but the cashflow from the total portfolio is positive, then it won't matter too much if you have a vacancy or three at once, and the overall income from the rent will be high enough to have got you to 10 properties in the first place.
It is rare; if not impossible to have 10 properties with a neg cashflow.
If you work on buying each property, based on it's merits and how it fits into your financial situation at the time, then it will all fall into place.
Also, with the tenants, even if you had 30 properties, you are probably going to have them managed by a Property Manager, so they will attend to all the day-to-day stuff.
You would also get Landlord's Insurance on each property, so the risks from rent default etc are covered, and you would also have building and public liability insurance as well.
This is all standard practice, and you do it one property at a a time. Later, as your portfolio grows, you may do things like have all the properties covered by one insurance policy, as we do, and you may have one PM managing a few properties and so on.
Keeping a tenant is relatively easy; charge a fair rent, keep the property well maintained, and have a good PM. You will get turnovers, but if you factor in 4 weeks vacancy into your number-crunching for whether or not the property will work for you, then you are covered.
As a general rule, you should expect up to 20% of the rent to be eaten up by "holding costs" such as insurance, body corp (if any), maintenance and this also includes your 4 weeks vacancy. This is not including the loan repayments. Go for interest only loans as well to help with the cashflow.
Our average period for each tenant since we began investing in 2001 would be around 18 months per tenant I reckon.
You will also need a savings fund, or access to some other equity in your PPoR of at least $10k to cover things like new hot water service; bigger expenses like that. So far, I haven't copped one of these, but even if it happened, my PM's are instructed to inform me of any repairs that are required, I give them permission to get them done, and the cost of the repairs are deducted from the rent.
The rent is automatically dpeosited into our bank account each month by the PM.
I get sent a statement, with a copy of the invoice for the repair, and the money has been deducted from the rent. Same with the coucil and water rates.
i used to think the same……….OH ALL THE RISK
insure against the risk, take a chance, most renters are really good people.i have a default rate on my investment properties. it can always be sorted out. it may take a commercial offer to appease the offending party, but thats OK you still own the property. just set a target for the risk level you are comfortable to live with and just do that………….HINT be aware that when you get there you may be tempted to engage further risk
Hey all thanks for the replies – they have been greatly appreciated.
Just out of curiosity marten, what type of insurance should be taken out?
Cheers
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