30% Property Crash…How Worried Are You?
?? I just read a news article on Commbank predicting 30% property crash due to Coronavirus. Look, news media are news media. They are paid to get people’s attention so I wouldn’t blame them for being ‘fearmongering’. After all, it’s bad news that often sells. However, looking at what happens around us with businesses closing down, and even major corporate like Virgin Airlines can even go to administration, I can’t but begin to imagine what financial “domino’s effect” it might have on property market.
I had a haircut yesterday and the hairdresser told me about her negatively-geared investment property, and how her husband was doing gigs in pubs to pay for the shortfall. Now, that income is completely gone. She also told some of her customers were asking for shorter haircut than before to prolong the need of having to go back to get another haircut because these customers are now on JobKeeper which means, their income is now way less than before.
While I have to literally interview every single Australian property owner to give me the complete accurate picture of what might happen with Australian property market, either way, this virus will somewhat have implication on the property market. Question is, how much?
In my experience as a property investor, you only lose when you have to sell early. The keyword here is “you have to sell” and “early”. You see, property investing is a long term game. Just like Warren Buffet with shares, I prefer doing property as an “investment”: that is to hold long term, instead of “trading” where you would generally “flip” e.g subdivide-build-sell, reno-flip, etc to earn fast equity and profit.
While you can make good money in flipping (just like what my buyer did with this property that we bought last year 2019 for $415k, renovated and sold again 7 months later for $670k https://easybuyer.com.au/portfolio/renovators-delight-renovation-and-flip or the $530k 4×3 property in a suburb where 4×2 has sold for at least $750k https://easybuyer.com.au/portfolio/blue-chip-renovators-delight-renovation-and-flip), it is way riskier to execute flipping especially in the current market due to the low selling price.
I have been approached many times by mom-and-dad developers trying to offload their multi-unit development site. When I did my valuation however, they are easily $500-$600k less than what they have bought it for. Had they been able to hold long term and just rent them out, I don’t think it will be an issue. However, since many of these mom-and-dad developers were borrowing from the bank, the holding cost often outweighs the revenue, making the cashflow way in the negative.
So, my question to you is, where are you with your portfolio currently should house price crash by 30%? Can you hold or do you have to sell early? What are you going to do if your tenant asks you for rent reduction, or if they can’t pay rent at all due to them losing their job? You still have all the council/water rates, mortgage, insurances, maintenance, etc to pay. Can you hold?
This is why in my opinion, diversifying our property portfolio is paramount. We should not put all our eggs in one basket. Just buying all (the so-called) “high growth $500k+ property” is probably as bad as (if not), worse than buying all “low priced high yield positive gearing” property. (On this note, if you ask me though, instead of owning 2 x $500k property I would choose 5 x $200k any time of day).
Nonetheless, diversification is key. I myself own 2 slightly negatively-geared properties and 5 high-yield positively-geared properties (7-9%+ gross yield). The income of the 5 have been able to offset the losses of the 2. My negatively-geared properties (located in arguably higher-priced suburbs) demand higher rent and have experienced rent reductions down from $410/week to $390/week. My positively-geared properties however, are running strong. All my long-term tenants have been paying on time and I have not had any rent reductions requests (knock wood).
Therefore, should property price drop 30%, I hopefully have minimised risk. Even if I have to lose my main job and experience major cut of my income, at least all my properties can run by themselves.
Plus….we all know property value will always grow long term. Give it 20 years, it does not matter if you own $1mil property or $100k property. All will experience capital growth.
The question always comes back to: do you have to sell early?
Conclusion
Do not underestimate the power of highly positive gearing properties. These properties I’ve bought for my clients: A $220k property that rents for $320/week https://easybuyer.com.au/portfolio/high-yield-tenanted-investment-756-gross, a $205k property that rents for $300/week https://easybuyer.com.au/portfolio/renovation-retain-refinance-66-yield-or-100k-3-months, the $170k that rents for $280/week https://easybuyer.com.au/portfolio/high-yield-7-buy-hold-potential-subdivision, the $148k that rents for $240/week https://easybuyer.com.au/portfolio/buy-hold-8-yield, etc, depending on how much LVR you have, that $1000-$2000/year net positive cashflow might not sound much. But if you own 5 of these, that $10k extra can seriously assist your higher-growth negatively-geared portfolio. I myself am doing the 4-for-1 strategy. For every 4 positive gearing properties, I buy 1 negatively-geared.
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