In challenging times it’s important to have some basic strategies up your sleeve – not to thrive, but simply to survive, writes Mark Withers.
1 June 2020
Building wealth in recessionary times with property is achievable, but first you have to get through the recession. Here are some coalface ideas on strategies to consider:
• Fight like hell to retain your assets. If you can avoid selling on this market, do.
• Focus on your tenants. Your income is key and they are key to it. Do whatever is necessary to keep your property occupied. This will mean offering flexibility if tenants reach out to you for help. Help could include rent deferment arrangements or time-limited rent reductions.
• Ask for proof that tenants’ incomes have been impacted before making concessions. Unfortunately, some tenants may look for concessions before they have been personally impacted and it is not unreasonable to expect them to prove their claims of hardship before you agree to add to your own.
• Keep in contact with your bank. Keep an open line of communication; make sure the bank knows you are in control and are making arrangements as necessary. Expect the bank to want to know if you have been forced to offer concessions, document what you are doing for tenants, and what criteria you have placed on the concessions, and for how long.
• Remember that credit lines are vulnerable - the banks can cut them even if you are not in default. Consider opening a new banking relationship and potentially drawing down on some credit to create a deposit with another bank.
• Review your mortgages. Could principal and interest table mortgages be switched to interest-only?
• Be cautious of mortgage holidays. A mortgage holiday simply suspends repayments. The bank is still charging the interest, so you are going deeper into debt and paying more in the long run if you accept a holiday. But if you need the holiday, take it.
• Review fixed terms and fixed interest rates. Breaking a fixed rate and taking a penalty is generally not beneficial, but these are unique circumstances. The penalty is tax deductible. If the lower repayments are material to your cashflow, taking the penalty rate hit is an option. Find out what the break costs are and ask the bank for a concession on the penalties. If you don’t ask you won’t get.
• If you are exiting fixed rates, consider staying floating. Floating rates may well be lower now than fixed rates and there is currently no upward pressure on interest rates. Every day you can ride a lower variable rate (rather than a fixed rate) is another day with a lower interest cost than you might have had otherwise.
• If you have good equity, you have retained your job and your tenants are paying, consider asking the bank for a new line of credit. This will give you a further buffer. It will be easier to get when you don’t need it than when you do. This also opens the possibility up of acting quickly if a purchase opportunity presents.
• Review your maintenance and capex budget. If you are tight, put off expenditure that can be delayed, but if your cashflow is robust, consider doing some of the work on your properties that you have been putting off. You will be able to buy the work more cheaply than before, you will be helping someone else by keeping the money flowing and you will be enhancing your asset.
• Review all your investments. Can you consolidate by liquidating things that were not core to your strategy and reducing debt instead, especially if you have the ability to redraw on credit lines?
• If your income is stable and you have borrowing power consider buying. It will be a buyer’s market. Fortunes will be made by those who remain calm and seek out opportunities to acquire properties at bargain prices. Yields will rise now as property prices fall and it is certain that yields now will be achievable at levels well above interest rates. To bag a bargain, you have to be willing to make an offer. Ring the agents you work with and make sure they know you are looking.
• Get clarity around your bank’s current lending criteria. Despite loan-to-value ratio rules being relaxed, the banks still have quite strict “stress test” criteria that can require you to prove you have the income to service debt at interest rates as high as 7%.
• Ask for rating relief rather than missing a mortgage payment. Councils will generally defer rates and consequences are less serious than missed mortgage payments.
• If you have short-term rentals that are now vacant, consider a permanent tenant but check GST consequences.
• Lean on the professionals. They are likely to have helped clients navigate recessions and will have much to offer.