KEY POINTS:
If you believe that the housing market is a bubble about to burst, then it's time to take action. That's especially true for property investors.
In less than a week I've received information about two seminars aimed at investors who are taking the possibility of a property slump
seriously.
The first was Empower Education's seminar, aptly named Dodging The Fallout, to be held next month. The second, which I attended, was entitled How to Survive Property Investment Ups & Downs, run by accounting firm Gilligan & Company.
Gilligan & Company director Alan Gilligan says he organised the seminar because his staff are fielding calls from worried property investors almost daily. Some, with several properties, have annual interest bills of $30,000 or more. A 1 per cent interest rate rise is sufficient "to beggar" some investors.
Anyone who thinks that property never goes down in value, just stagnates, ought to listen to the sorry story that presenter Mary Holm told at the Gilligan seminar. A house Holm had bought in St Heliers in the months leading up to the 1987 crash lost 30 per cent in value pretty promptly when buyers dried up. The message from the seminars is that property prices can and do fall periodically. "Younger people have been told this, but they don't fully absorb it," says Holm.
Empower Education's keynote speakers Olly Newland and Mike McCombie have both had their financial blood let, says organiser Peter Aranyi.
A slump isn't a problem if an investor can hold tight until prices rise again. Even for those who can't hold on, the answer isn't necessarily for investors to sell everything, hoping to get in again when prices drop.
A better strategy might be selling down the worst performing property and using it to reduce the debt on the others to withstand the storm, should there be one. Those investors who have just one rental property that is heavily geared, and who are paying a significant amount each week to prop it up, may need to look for ways to increase the rent, increase their own income or find access to credit to weather the storm.
Tips from the Gilligan & Company seminar included:
* Don't try to time the market, but make sure you can ride it. If your time horizon is 10 or, even better, 20 years, you're unlikely to make a loss.
* Don't let yourself get in a position where you're forced to sell; you'll probably get a lousy price.
* Ensure you understand the tenancy agreement and know how long it will take to get tenants out.
* Have your agent lined up to sell, should you need to, and have your maintenance up-to-date.
* If you need to sell ensure you can get access to the property for viewings. It might help to offer your tenants the final few weeks rent-free if they allow access, keep the place clean and stay until settlement date.
* Try to sell the worst property first. John May, board member of the Auckland Property Investors' Association, and someone who has personally had the plug pulled on a former property empire by lenders, adds:
* Fix mortgage interest rates on your investment properties now to get through any bumps for two, three or even five years.
* Do a SWOT analysis of risk and try to rectify any potential problems in a portfolio. You don't want to be crawling to the bank after your values have fallen over, says May.
* Ensure your properties are well maintained so if you have to sell you are ready to. Maintenance will also ensure that tenants are easier to get in the hard times.
* Get lines of credit approval now and increase your credit card limit for use should the worst case scenario eventuate.
* Have a fighting fund over and above revolving credit or other floating rate mortgage facilities, because these are often pulled first by lenders.
As a last resort, says May, he would put all his properties up for sale at once, knowing that one at least would sell quickly and take the pressure off the others. "Property investment is a numbers game. The chances are better if you put everything up for sale at the same time."
Investors who do sell need to be wary of the tax implications. Many have claimed large amounts of depreciation on their properties even once they've sold, says Gilligan. If they've got a 100 per cent mortgage on the property they will have to find the cash to pay the Inland Revenue Department. They could in theory be classed as traders and charged tax on their capital gains.
There are two sides to any financial fallout. There are those who get out and take a loss and there are those who profit from it.
Newland, an investor, author and seminar presenter, has profited from house price crunches in the past. In the 1970s, in particular, there were what he describes as good pickings available when developers went to the wall en-masse. "The receivers and liquidators were giving away (commercial buildings) at ridiculous prices. In the residential market there were a lot of developers who had built houses and flats and couldn't sell them. They were knocking on anyone's door begging you to take them off their hands before the banks came and rolled over them."
To be in a position to snap up the bargains, says Newland, investors need to:
* Cash up so that they have money to buy.
* Organise a good line of credit for the same purpose.
* Have patience.
The last point, says Newland, is the most important. Investors shouldn't be first out the door to buy because the first great opportunity that presents itself "may be a bargain as it whistles past you all the way down". He adds: "The property market is a slow moving creature. It can take months or years. Just look at the aftermath of the 1987 [stock market and subsequent property market] crash. It wasn't until 1991 that it hit bottom."
Property market educator Dean Letfus adds that now is a good time to have property revalued if you want to have the money around to pick up bargain properties.
Whichever side of the equation an investor is on, it's wise to act before there's a crisis, not after.
"The credit crunch seems to be creeping up," says Newland. "Every week there is another turn of the screw."
Newland says a property crash is not like the sharemarket, "where a button is pressed and it has gone". For a slump, there will first be a tipping point, which could be anything from one of the larger developers or finance companies going into receivership, the employment market faltering, or other factors such as the yo-yoing exchange rate, or terrorism. "I don't think we have reached that point yet. It needs one more big event to push us into the slump. It might not happen. But investors will know if it happens."
Aranyi adds that market slumps aren't necessarily bad - they are times when the cowboys get their comeuppance.
* Recommended reading: The Day The Bubble Bursts, by Olly Newland.
