How to Mitigate Property Risks?

In my last video, I talked to you about the risks of investing in residential property and they are important things to consider. There were five of them. There was legislation risk, gearing risk, general or what I call value risk, tenancy risk, and liquidity risk. Now I want to talk to you today about mitigating those risks.

Now when it comes to legislative risks, one of the ways in which we can just keep an eye on things because we can’t necessarily determine what the government is going to do, but certainly we can vote with our feet.

So if there are any planning changes that might bring up density in a certain area, if we’re active in that community, we can certainly lobby cancel and lobby the local government to make sure that doesn’t occur. From a federal point of view, there’s often talk about what’s going to happen with negative gearing and those types of things.

I personally believe that if the government wants to take away the opportunity for people to invest in residential property on the volume that we do, that 30 percent of the population is basically renting. If those people left the market and the government had to supply that accommodation, then technically it’s a very, very big spend for them.

So I don’t see that as being a big risk for us.

In terms of gearing risk, yes, it’s going to be important for you to understand what sort of level of gearing that you want to take on. As a rule of thumb, I don’t like to go higher than 80 percent across your portfolio. That’s only in your accumulation stage. As we build up the portfolio of properties, we then certainly want to amortise that debt out and get rid of that. Once we do that, then it’s the passive income that flows from that.

In terms of value risk, well, that’s all about research and doing your numbers. Understanding the level of supply currently, the future supply that’s going to come online, the underlying demand in that particular marketplace and then most importantly getting into the psyche of the human interests and human behaviour of people to know where they want to live and why they want to live there and look at their incomes, because that’s going to be the growth trajectory that we’re trying to achieve in terms of the capital gains we’re going to get in that area.

In terms of tenancy risk, this is an interesting one. There are insurances around that can protect us from tenants not paying, from tenants damaging the property. So I’m a big believer in making sure we have a strong defence mechanism around us and part of that defence is to ensure that we have those landlord protection insurances in place and we should factor them into our cash flows.

Speaking of cash flows, liquidity risk, that is all about money management. Now until we build up that wealth base, we are the most important person when it comes to driving that income to service the debt, to control the assets, to control those properties.

So again another great defence or risk mitigation strategy is to ensure you have your income protection, your life and trauma and TPD covers in place. They are absolutely critical and they form the foundations of what we call our A to D Defence Strategy. Now I will talk to you about our A to D Defence Strategy as we move forward in terms of some of these how-to sessions but let’s wrap that up. Let’s summarize that.

Legislation risk. Look, we can continue to keep an eye on what’s happening on a legislative point of view and ensure that we’re not taking great risks in the work that we’re doing. They will always be around. Gearing risk. Well, that’s about being sensible. That’s not about being too greedy and gearing yourself into a position where if something was to go wrong with your incomes or you weren’t getting your properties let correctly, that the domino effect that you would have to sell those properties. We don’t want to be in that position. Value general market risk, that’s about understanding and doing the numbers around what’s important from a supply and demand point of view. Tenancy risk, let’s mitigate that through getting our landlord protection insurances in place and liquidity risk, that’s all about insuring you because you’re the income that’s going to get the strategy moving.

Thanks for your time.