Fear is a huge motivator to inaction when investing in property.
We’ve been taught that debt is “bad” therefore we try to avoid it like the plague.
It’s difficult to accept the fact that not all debt is bad. If we take on debt that we can pay off with someone else’s money (tenants) and which even saves us money (taxes) then it arguably becomes “good” debt!
Granted, the end result of wealth creation should be an investment portfolio that delivers positive cash flow with zero debt obligations, however, to reach that desired result it takes capital.
Obviously then we’ll need to get that capital somewhere and for most of us mortals it involves using leverage (a.k.a. debt)!
Change Your Mind
To defeat the fears that come with any new venture we need knowledge but knowledge alone doesn’t create wealth. We’ve got to put that knowledge into action.
The following psychological factors keep many investors from success. Don’t let them stop your wealth creation efforts.
Do you know your own tolerance for risk?
It can be easy to say you’ve got a high tolerance for risk when the bank account is flush with cash, but is it still true when your last tenant has left and the market’s turned south?
Anyone who says that property investing isn’t risky is selling you some magic beans.
The key to defeating your fears is to figure out the worst-case scenario and decide if you can live with the outcome.
Ask yourself the following questions to gauge your own risk comfort level:
- What am I willing to lose in order to create wealth over the long term?
- Am I comfortable with borrowing the maximum loan I can get?
- Can I buy using my head and keep emotions out of it?
- Do I have to manage it myself to feel comfortable or can I buy it and leave within a property manager’s care? In other words, can I let the manager do his job (assuming I’ve vetted him well)?
- Can I live with the drops in the market cycle knowing that investing is for the long term?
If you’re feeling a bit shaky about taking the plunge the following strategies can help reduce the fear factor by mitigating your risk:
- Always establish a good buffer when purchasing a property. These funds will be used solely for any costs that arise with the property, keeping your pay in your back pocket.
- Purchase property that is always in demand with little risk of declining values (e.g. located near CBD)
- Avoid cross-collateralisation; keep your home loan separate from your investment property loan(s).
Worst Case Scenario
To help ease your fears, work out what the absolute worst-case scenario might be if you invest in your first (or next) property.
For example, let’s say you’re afraid that you’ll have no tenant for months on end and have to pay the mortgage out of your own funds.
Here’s how to reduce that fear:
Let’s assume you own a positive cash flow property that gives you $20 per week in extra cash flow. This is a modest sum and not entirely impossible to achieve.
Over a year’s time this amounts to $1,040.00.
Now let’s say you’re renting it for $200 per week. With the total amount of positive cash flow you receive ($1,040), your property could be vacant for as long as 5 weeks before you have to pay out of pocket!
Don’t forget tax deductions!
If you’re in the 30% tax bracket, take $60 off and you’re left with only $140 owed, giving you even more weeks of vacancy.
However, what you would normally do if your property is vacant for a couple of weeks is reduce your rent. This is how a positive cash flow property (and of course a good buffer) can help you weather market fluctuations.
For example, let’s say you dropped the rent down from $200 to $180. You’re giving up your positive cash flow, but it’s still costing you nothing monthly to reduce the rent.
When the timing is right, bring the rent back up - or increase it - to beginning adding back to your buffer.
If your property is vacant due to damages, your landlord’s insurance should fill in the gap.
As you can see, knowledge and contingency planning allows you to defeat the fear of tenant vacancy.
Finally, follow this strategy with each fear that’s put you into analysis paralysis and you’ll be well prepared to take the leap and create wealth through property investing.
Sam Saggers is CEO of Positive Real Estate and Head of the buyers agency which annually negotiates $250 million-plus in property. Sam's advice is sought-after by thousands of investors including many on BRW’s Rich 200 list. Additionally Sam is a published author and has completed over 2000 property deals in the past 15 years plus helped mentor over 2200 Australian investors to real estate success!
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Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.