I noticed towards the end of last year that the same question was being asked over and over on my livestream Q&A sessions: with all the talk in the media of recession and slowdown in the economy etc, a lot of people began to wonder whether should they sell their properties, or should they withdraw any offers they might have recently made but weren’t yet legally committed to yet.
These are very understandable questions and concerns. How should you choose the correct path? There’s no simple answer here, by the way. But there are a lot of questions that you need to start asking yourself when it comes to making any kind of a dramatic shift in the strategy you’ve been following till now.
Your strategies may change over time as new information appears, but you got to dig into the real fundamentals to get down below the surface – your immediate reaction – when you’re looking to make a big change. Why do you need to make a change? Have things changed to the point that you need to do it out of survival, or are you emotionally reacting (and perhaps overreacting)?
When uncertainty creeps into your mind the first questions you need to ask is, what is causing this shift in your mindset? Has it come from the market, is it created by actual fact or just hearsay? And how much of it is under your control? How much of it is under the control of other people, and how much of it is completely outside of your control?
The next thing to consider is what it means for your long-term goals.
Why did you get into the property investment sector? Was it to build a long-term passive income portfolio? Was it to flip properties as a side hustle? Or was this a career that you’ve chosen and want to dedicate the next 20 years to building a large portfolio that creates a lot of income and a lot of wealth in respect to those goals? Has your fundamental mindset changed here?
Perhaps if you’ve been doing this solely as a side hustle rather than a long-term thing, that’s good reason to have a very good, very solid, think. If you’ve been scraping your money together and can barely make ends meet, this might be the time to shift in the direction that you’re going. But, if you’ve made a plan for another ten to 20 years and therefore this is really just a blip along the way, the issues we’re seeing now are not a reason to get out of the market.
Remember, there’s an old saying, “time in the market will always beat timing the market”. So you have to think about how bad could it get and for how long. These are two things that none of us really know. But something you could be do is (for example) to look at your interest payments and think about what it would look like if interest rates were to double.
Would you be able to afford those payments? Some people may have no problem with that, but other people may struggle because of how they bought the property: if they managed to put down a deposit that took them everything, and the property is only throwing off a very small yield, it’s clearly going to be a struggle.
Consider how exposed are you if things go wrong – could it take down your entire portfolio? Might it impact only one asset and you could just let that one go? This is something that you really need to think about because most of the time banks will lend, but try to cross secure your assets. If you’ve bought one asset, it’s looking really nice, so you then buy another, the banks will want to have security against that first asset as well. Which means that if this second asset goes negative, they’re going to go after the first one as well.
If you have a large portfolio, how much of it is cross secured and tied in? Would it have a domino effect if one asset goes, pulling down multiple others?
You also need to thing about your investment horizon in terms of your age. If you’re young, maybe in your 20s, you’ve got another 20 or 30 years of investing ahead of you and this could just be a blip. But if you’re on the verge of retirement, are you at a point where, once you’ve stopped work, your income is going to dramatically fall? If you’re going to be relying on a state (or your own) pension and your property portfolio was intended to contribute to your income, then staying in or getting out of the market is obviously a serious consideration.
These are just some of the questions that you need to ask yourself, and each answer prompts a different response to whether or not your strategy should change. So let’s take a look at some of the fundamentals of your strategy, like why did you start investing? Was it for a long-term or a short-term period?
When you bought, did you buy good assets? Did you buy assets that you could add value to, or did you buy them with full value? What kind of income yield from the asset are you getting? And what kind of buffer do you have above the mortgage rate that you’re paying? Did you buy the flip or did you buy the hold?
The reason I’ve asked these questions is because I want you to assess your strategy in light of the answers. If your strategy was long-term, then you knew (or you certainly should have) that prices fluctuate. The market is cyclical market and will go up and down. No-one should be foolish enough to have think that the market is upward-only and that it will never suffer any kind of a downturn. That being the case, can you put aside your immediate concerns and be prepared to weather the storm?
If your property goes below the price that you bought in at, don’t forget that that is just what the market is temporarily valuing your assets at. It doesn’t necessarily mean that the asset is worth that low amount to you: it all depends on what you use that asset for. If you are still getting a healthy income, then there should be no reason for you to worry about it. Don’t think of the situation we’re in now as being unusual: all investment markets rise and fall. But remember, the property market is completely linked to the cost of borrowing. So whenever the cost of borrowing goes through fluctuations, the property market is going to fall in value. The market will bounce back and everything will be fine.
So really, it’s just a matter of how you’re funding your holding. This is the question that I want to kind of really dig in my next post – come back and join me next week when I’ll be looking at how exposed you and your lifestyle could be in the face of increased interest rates.