Sometimes the smartest thing to do is to go against the grain and explore some counterintuitive strategies if you want to hedge your bets during a downturn.
Believe what you want to believe. But the party appears to be coming to an end at least for the Sydney property market.
Of course, there are still some of us who refuse to see the reality. We continue to cling to hopes and beliefs that somehow there’s some hidden driver that will propel the market to another stratospheric high.
The stats show otherwise. Auction clearance rates are falling (Week ending 11 June was 71% for Sydney and 77% for Melbourne). At the same time, the number of properties listed for sale has also increased dramatically.
So amid the growing evidence of a market slowdown and tightening regulations, it’s time to re-examine your strategies to strengthen your portfolio and avoid gut-wrenching losses.
Here are some strategies that go against the advice by many experts but could be your saving grace during a downturn.
Counterintuitive strategies to consider now
1. Sit tight for now.
Sometimes the best move is not to move at all. As investors, it’s in our nature to want to be in action and take part of the action.
It’s difficult to sit still when the market is going crazy. But taking a seat on the sidelines and watching how things will play out over the short term may actually benefit you.
Remember that you don’t have to be fully invested all the time.
It’s important to know when to hold off, even for a short while. That time is now.
Let people do all the crazy things they do when they’ve succumbed to irrational exuberance and FOMO.
When the downturn gets underway, you can go back and join the party. And buy at a better price.
2. Consider Principal & Interest (P&I) payment.
Yes, you’ll have to pay higher mortgage repayments and you can’t claim a tax deduction on the principal component. But there are huge benefits to paying P&I in the current climate.
Firstly, it helps you pay off your mortgage faster and reduce your risk during uncertain times. Paying principal on your loan also increases your equity faster.
The other reason is that the banks are tightening their lending policies on Interest Only loans so, in the end, you may not have a choice.
Recently, the major banks have raised mortgage interest rates on the Interest Only loans and some have cut rates on their P&I loans, which is another incentive to consider this option.
With interest rates still low, your P&I repayments will make a bigger dent in your debt. When the interest rates go up, likely next year, then you’re already well ahead.
3. Reduce your overall LVR (Loan to Value ratio).
No doubt there are benefits of high LVR loans: You can spread your cash and buy more properties. This helps you build your property portfolio faster.
However, having a high level of debt against your properties places you in a vulnerable position when your properties become vacant or you lose your income.
By reducing your debts through extra repayments or paying a higher deposit, you’re also lowering your risks and exposure when interest rate rises again.
Having a lower level of borrowing also places you in good stead with the banks as you’re considered a low-risk borrower.
4. Hold off on a major renovation.
During uncertain times as we’re currently experiencing now, it’s best to hold off on your renovation.
While there’s a potential to increase the value of your property through a smart upgrade, you’re probably not going to see a significantly higher capital gains or even an increase in rental yield.
That’s because, during economic uncertainties, tenants are less willing to pay more for a nicer rental home. People tend to conserve their cash and therefore look for the cheapest acceptable rental they can find.
This doesn’t mean you forgo maintenance altogether. You still need to keep your investment property in a rentable state. However, hold off making any significant upgrades until the markets stabilise or start rising again.