My perspective on property investment is straightforward (some may consider it simplistic): Over an extended period, you cannot lose. Property prices fluctuate, but even after a decline, they inevitably recover. The key to ensuring your success? Avoid being compelled to exit the market when prices are depressed.
As with many challenges, once a problem arises, it is often too late to address it effectively. The crucial strategy is to prepare in advance. Here are four measures you can take now and— consistently—to ensure your portfolio remains resilient in any downturn.
Allow Your Loan-to-Value Ratio to Decrease
The primary risk during a market crash is the inability to maintain mortgage payments, which could force a sale at the lowest prices. If your loan-to-value ratio is at 75% and prices plummet, you might need to refinance at 90% of the property’s value, which could be unfeasible and leave you stuck with an expensive standard variable rate. Failure to make these payments results in the loss of the property. To safeguard against this, avoid the temptation to borrow more as your property’s value increases. Allow your loan-to-value ratio to naturally decline over time. By reducing it to 60% by the time a crash occurs, you will likely secure favourable borrowing terms and maintain profitability.
Maintain Competitive Rents
A robust rental income buffer is your best defence against a crash. Increasing rents gradually is essential to achieving this. Many investors, confronted with rising costs in 2022, found it was often too late to adjust rents significantly. Tenants might be within a fixed term or unable to afford a substantial increase. By aligning your rents with market norms through annual small increments you can avoid this predicament.
Build a Cash Reserve
Most issues boil down to cash flow problems. Although the market value will eventually recover, you need cash to endure the interim. This is where an emergency fund is vital—enough cash to cover a reasonable worst-case scenario. Holding more cash than the bare minimum may seem inefficient, but it significantly mitigates risk, allowing you to pay off debt if necessary.
Capitalise on Booms
Typically, a property crash follows a boom. The error lies in becoming overly enthusiastic and overpaying during this boom. Instead, use this period to divest any underperforming properties. The proceeds can enhance your emergency fund, reduce debt, or be kept in reserve, ready to seize opportunities when the market recovers.
By adhering to these strategies, you can fortify your property portfolio against market volatility and ensure long-term success.
Author: Jag Chaggar
