Buying Property & Financial-Crash proofing your investments: how to get yourself into a position to survive any market correction

Welcome to Finance and fury

• Financial-Crash proof your investments
• This is a flow on from the last Say What Wednesday, this episode talks about how to get yourself into a position to survive any market correction.
• We'll cover off on the two types of volatile investments – Property and Shares; today's episode will focus on Property, and in the next episode we will look at shares.

What is a correction or crash?

• A decrease in prices, followed by mass hysteria and panic selling, which further decreases values
• Why prices go down?
  1. Something spooks the market – The market is just individuals like you
  2. When people get spooked fear sets in and with fear comes 'myopic loss aversion'.
  3. While this is a technical term, but we all know the feeling – seeing investments go down in value doesn't feel good so people sell to avoid further loss
  4. But what happens if you just don't sell? Those that don't sell haven't realised losses

Property

• Property investing is all about your finances and behaviours – property is just the vehicle to create the wealth
• Property is a long-term play so you can set yourself up to survive the long term.
• The economy works in cycles – one criticism of the free market
  • Ups and Downs are needed – remember volatility – downward movements need to be accepted to have access to upward movements in price

What you can do:

• On the buy: One of the best ways is to make some smart decisions on the buy
  • Buy below intrinsic value - look for something that isn't overvalued
    • I avoid 'off-the-plan' - built in first home owner grant in price
    • Don't overpay - emotions in auctions can kill this
  • Overpaying also kills any future gains - don't get emotionally attached or let your emotions control you – Fear of Missing out (FOMO)
• The property itself: Future growth is all about demographics
  1. Look for something you would want to live in – as other people are like you
  2. Owner occupied properties are less volatile than speculative investments
  3. Ensure that it will have the best chance of being rented and not sit there chewing up your cash flow with no tenant
  4. High land to value ratios – land in property is important – not a massive block but getting the land value right is important
  5. History of long term – stable capital growth
     • Desirable areas – infrastructure, transport, schools, nice area
  6. Can the property be improved to increase the value?
     • Worst house on the best street

When the crash comes:

• Get buffer! – Having a cash reserve will help you survive short term correction
  1. And offset account on property rather than savings – save interest
• Don't over leverage:
  1. Covers interest repayment increases. More debt = greater cash flow requirements This can force people to sell
  2. Covers massive losses Deposit of 10% = Loss of 100% if prices go down by 10%.
  3. Don't cash flow yourself out of existence
     1. If interest rates go back up, don't be forced to sell – stress test yourself
     2. Work off worst case (like the banks) and see what CF looks like at 8%

• Don't panic sell, or be forced to sell
  1. Thankfully property is harder to dump than shares, but people can be forced to sell with property (banks are the boss until the loan is paid off)
• Insurances – more to cover a "crash" in your personal life
  1. Cover your debts and cash flow in case of the unexpected

Property is a long-term game

• Spread the risks out – diversification
• Focus on reinvesting the additional rent
  • Either in an offset to build up the buffer, or
  • Into other assets which can help diversify

Summary

• Market sentiment – Consumer confidence is one of the key drivers of property cycles
  1. Positive sentiment leads to bubbles – overshooting during 'booms'
  2. Negative confidence leads to markets overreacting on the down, overshooting the other way and getting too depressed during slumps.
  3. Remember, each property boom sets us up for the next downturn, just as each downturn sets the scene for the next upswing.
• Demographics drives markets
  1. how many of us there are, how we live, where we want to live and what we can afford to live in
  2. What state is peoples' finances/the economy in?
  3. Macro factors like interest rates, consumer confidence and government meddling (first home owner grants have pushed up new build prices)

Thanks for listening!

• Next Sunday's episode will be focusing on shares and avoiding getting wiped out in a crash
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