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Investing Without Fear

General Advice
September 12, 20228 min read

When it comes to property investing, most investors experience fear at some point in their journey. Fear usually stems from an intense concern about the unknown or uncertain. Learning how to overcome your fears is a key ingredient to success." - Allan Pearson

Introduction:

When it comes to property investing, most investors experience fear at some point in their journey. Mentors with Real Life Experience reveal time-tested strategies to help overcome the nerves and initial jitters and assist you to mitigate the risks - so you can invest with confidence.  Property Investing INVOLVES RISK (FEAR) so buckle up your racing harness and prepare for the most exciting ride of your life!

Fear usually stems from concern about the unknown or the uncertain. Having no knowledge of or control over future events in many instances causes nebie investors to freeze up and not pull the trigger on a prospective purchase.

In the case of the inexperienced investor, fear of the unknown or making a mistake stops many investors from 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 your plans with people who know and understand what you’re trying to achieve.

Side-note: Be wary of many Financial Advisors who have not direct property investment experience, and will only recommend to their clients - investing in the Stock markets, bonds, derivatives, or if you must invest in property - only recommend investing in a listed or unlisted REIT (Real Estate Investment Trust).

Investing Without Fear

IDENTIFYING RISKS

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

1. Risk/Fear: of increasing your debt level and not being able to make the repayments

Bad debt is generally associated with 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 whilst the owner reaps the reward of the increasing capital growth in the value of the property. In short, depending on your gearing strategy, the property may pay for itself!

Bear in mind that banks will not lend if they don’t believe you can repay the debt – and the banks’ lending criteria also includes a safeguard allowing for interest rate rises. These guidelines not only reduce your risk, but alleviate some of that fear as well.

2. Risk/Fear: of supporting an investment property if you lose your job

Before getting into the investment market, you will need to decide whether you are considering a positive or negatively geared property investment. Based on the approach you take, there are different strategies to reduce your financial exposure should you lose your job. You need a ‘rainy day’ strategy, and there are a couple of pre-planning options:

• Positive cash flow property

This is 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. The ongoing surplus can be used to help support the property expenses if you found yourself unexpectedly unemployed.

• Negative cash flow property

Negatively geared property is when the properties expenses needs ‘topping up’ from your income to balance out. 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. Alternatively, talk to your Tax accountant about claiming a variation to your PAYG tax amount each week. This allows you to access your tax refund as a reduction in your weekly tax, rather than waiting for a lump sum when you have lodged your annual tax return. You will need to be disciplined to put this amount aside each week to help accumulate a buffer to maintain the property in the unfortunate event that you lose your job.

In a couple of years, you’ll likely have enough buffer and equity to use for a deposit on another property. Remember, with a tenanted investment property, you only have to find money for the short fall not the whole loan.

Worst case scenario: if you lose your job before your savings buffer is built you will need to look at your budget very closely. It would be a shame to lose this future wealth for the sake of not cutting back on your discretionary expenses for a short period of time.

3. Risk/Fear: of not securing a tenant

This is one of the most common risks that newbie 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 interviewing potential property manager early in the purchasing process (as part of your Due Diligence process). Interview and select the property manager before you settle. Your property manager 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.

Side-Note: Ask potential property managers how many properties they are responsible for. A Manager with 100 or less properties will do a much better job than one who oversees 200 or more properties. It is your property and it deserves to be managed properly and you need to pay them accordingly - don't cheapskate on paying good property managers.

4. Risk/Fear: of bad tenants

  • How do you pay the mortgage if the tenants don’t pay their rent? Or

  • Pay for the repairs or damage they have 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 and legally allowed to be rented out to a tenant.

The answer is landlord’s insurance.

This insurance policy helps protect the landlord from bad tenants and the cost of this insurance is minimal when you consider the cost of not having it - and by the way - it is tax deductible as well.

By having a quality landlord’s insurance policy, 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 - AS LONG AS - you and your property manager have been upholding your responsibilities so as to not VOID your policy's Terms and Conditions.

5. Risk/Fear: of interest rate increases

We have no control over changes to interest rates; if the Reserve Bank of Australia (RBA) increases or decreases them (or whether our chosen lender chooses to increase or decrease their rates independent of the RBA) the rates will change regardless of how we feel about it.

The cost of using Other Peoples Money (Interest rates) are a fact of life and if you’re going to invest in property, budget for (and expect) Interest Rate increases and only purchase property that you can afford to hold onto. After all, it’s no fun living off baked beans for months or years at a time while trying to get financially secure in life. The finance lender usually takes into account a few interest rate rises as a buffer when establishing your loan serviceability in the first instance - but you need to know your budget and be careful of introducing new regular expenses to your budget without carefully considering the effect of your safety buffer.

EXIT 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 and costly decision. An defined written down exit strategy will protect your overall investment plan and give you peace of mind -when circumstances get a little rough.

The biggest breakthrough you can have in property investing journey 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.

Thank you for reading,

Allan Pearson

U1st Realty Sales BDM

Book An Appointment To Discuss How We Can Help You On Your Journey - Here


REMEMBER WELL: Your Profit is established When You BUY not When You Sell!    Do conduct thorough Due Diligence on any potential property/ies, but do not get so concerned about making a mistake that you forget to actually PARTICIPATE in the wonderful Game of Property Investing!

U1st Realty

U1st Realty Sales and Marketing Team

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