5 Tactics You Can Use to Combat the Fear of the Unknown

Posted by Ed McKnight on 25/03/20
Combattign the Fear of the Unknown in Property Investment
Introduction

5 Tactics You Can Use to Combat the Fear of the Unknown

You may have read all the articles on this website and be logically certain that property investment makes sense.

But perhaps there's something in the back of your mind that is holding you back.

This is common for first-time investors. It's the fear of the unknown.

Or perhaps you think: What happens if I suddenly lose my job? Or what happens if I don't have a tenant for a long time? Or just what if something bad happens?

While you can't stop anything bad from happening, you can protect yourself against it. That's why in today's article you will learn five tactics so you'll still be OK, even if the unexpected happens.

Tactic #1

1. Set up a Buffer Account with a Line of Credit

Let's say you're made redundant or you become unable to earn an income.

You might initially think: "I need to sell my investment property because I can no longer afford the 'top-up'.”

Selling your investment property unexpectedly would mean losing out on future capital gains, which would help achieve your long-term goals.

Instead of selling early, many property investors will set up an additional 'lending facility' or 'line of credit', which they use if times get tough.

Let's say you are able to borrow a maximum of $140,000 against your own property right now and you want to buy an investment property. You might borrow $100,000 for the deposit for that investment, and then set up an additional $20,000 of lending as a revolving credit or overdraft that you can access if you need to.

Because you would only use that line of credit when you need it you won't pay interest until you use it.

This sort of buffer account means you've got access to cash if you need it if the unexpected did happen.

A word of caution: if you use this tactic, you must be diligent and NOT spend the line of credit on things you just want to buy. This is a buffer account that is for emergencies only, and a new car, handbag or concert tickets are not considered emergencies.

Tactic #2

2. Get the Right Type of Insurance for You in Place

The next tactic is to make sure that you have the right insurance in place.

Simple policies like house, fire and contents will protect you in the event that you are impacted by major unexpected natural events.

But, going beyond that, you can also use landlord insurance. This type of insurance will cover you in some cases of unexpected maintenance and bad tenants.

Each insurance company offers different instances where they will protect you, and not all insurance companies offer the same type of cover. But a key one to look for is loss of rent:

  • Most companies will cover you in the event that your house is damaged and can't be tenanted. This ranges from 6 weeks to 12 months up to a maximum of $20,000. Tower, State, AA, AMI and Westpac all offer this or similar levels of cover
  • Some companies will also protect you if you have to evict your tenants because they aren't paying rent, if tenants have to be evicted, or if they leave without notice. AA, AMI and State all offer this type of cover

You can also insure the contents of the property that you provide to the tenant, accidental damage, methamphetamine contamination and hidden gradual damage (like the damage caused by a leaking pipe).

While all of these come with a cash cost now, if you are hesitant to get into the rental market because of the unknown, then you might like to take on these additional policies.

If you're concerned about potentially being made redundant then you might also consider redundancy insurance.

Tactic #3

3. Work with experts

It's helpful to find people who know the detail.

When you work with experts who understand the property buying process, you'll find out what you don't know, and they'll help you put plans in place so you don't make mistakes.

Professionals to consult include:

  • Property Coach or Adviser
  • Property Manager
  • Mortgage Broker
  • Accountant
  • Lawyer, and
  • Insurance Broker

Some of these, like a property manager, accountant and lawyer come at a cash cost now, but they will save you from having to fork out to pay for mistakes in the future.

Tactic #4

4. Remove the emotion and know the numbers – get a property investment analysis

Successful property investors worry less about the 'property' and more about the 'investment'.

Your 'unknown' might be to do with the property, what it'll end up looking like (if buying off the plans), or whether you'll get on with your tenants.

In many ways, none of that actually matters.

The reason you became interested in property investment probably wasn't because you wanted to have another nice looking house or that you wanted new friends who also pay you rent.

Instead, it's because you want a high performing investment that will provide for your financial future.

If you look at the Property Investors Chat Group on Facebook, you'll see people asking how to fix a leaky tap, what colour they should paint a wall, or how to deal with a tenant issue.

None of that should be a property investor's primary concern.

The successful property investor's concern should be picking the right investment, and leaving their professionals to manage the property, sort the tenants and conduct maintenance.

That's why, if you're hesitant to invest (and even if you're raring to go) you should conduct a property investment analysis. This analysis will forecast your rent, expenses and capital gains over the next 10-15 years.

The numbers should help focus your mind on whether the investment stacks up or not.

Property investment is a business decision based on maths.

Even if you are still worried about some level of risk, once you look at the potential reward you can gain from investing you might ask yourself: "For this level of gain, is this a risk I am willing to take?"

Tactic #5

5. Get educated

Lastly, property investment is a big decision ... one you don't want to make lightly.

So, if you don't feel you're ready to make that decision yet, then keep reading and keep educating yourself. This will help build your level of confidence to the point you are comfortable with making the decision.

Just don't leave it too long.

It's time in the market, not timing of the market that counts. So if you only learn but don't execute you are more likely to miss out on potential gains.

Conclusion

Summing Up

Summing up, there are risks in everything. From walking across the street to getting in your car every day and going to work, to purchasing your own house.

What's important is not the risk, but how we mitigate those risks, using things like pedestrian lights, seat-belts and standard insurance.

It's the same with property investment. There are risks, many of which can be mitigated so you still get the long-term benefits of property investment.