2020 has been a year unlike any other due to the ongoing challenges of the catastrophic Coronavirus pandemic. From the risk to human life and community safety, to the extensive disruption of our global economy, each one of us has firmly felt the impact from all corners of the globe, with experts predicting Australia to experience its deepest recession in decades.
However, it can be said that in times of crisis, opportunity has space to flourish which is particularly evident for property investors looking to strategically invest and refine their portfolio during the upcoming recession.
Below we will outline some key advice around investing during market downturns to help you maximise returns and minimise risk during periods of economic uncertainty.
But First, What Defines A Recession?
A recession can be defined as when economic growth is negative during two consecutive three-month periods, resulting from significant events that lead to mass market disruptions.
Factors that contribute to recessions include high interest rates, reduced consumer confidence and lowering wages which have knock-on effects of increasing unemployment rates and national debt, as well as slumps in the stock markets.
The Resilience Of The Property Market
Whilst the stock market is most certainly at risk of being derailed during recession periods, the property market isn’t necessarily exposed to the same level of risk.
As covered in our article Perth Property Market Predictions Beyond COVID-19 the property market is less volatile than the share market and presents opportunities for significant returns when executed with strategy and precision.
Listed below are a series of tips and strategies geared towards growth and expansion for savvy investors looking to make the most of the upcoming recession.
1 – Invest In Bread And Butter Properties
It’s always been said that the greater the risk, the greater the potential reward, however it’s best to avoid taking on unnecessary investment risks during times of market instability in order to protect your hard-earned investment dollars.
When investing during a recession, it is always a good idea to focus on “bread and butter” properties that are valued around median price points rather than the extreme ends of the market. The greater the price point, the greater you are exposed to downturns in property values, so it pays to invest in the right type of property. By simply focusing on investment properties within your financial reach, you will be minimising the potential fallout from property prices surging downwards during a recession.
2- Establish A Positive Or Neutral Cash Flow
By focusing on investment properties that are cashflow positive (or neutral at the very least) you can help to minimise shortfalls or negative gearing during recessions. If you are growing your portfolio and looking to acquire a new property, bargains can be found during times of economic instability, providing a great chance to acquire property under market value, with the potential for greater returns.
If you already own a property and are looking to leverage it further, introducing renovations can offer a new dimension of opportunity for better returns. For example, the introduction of an extra bathroom or bedroom can bring in an extra tenant to help contribute to your weekly cash flow. As mentioned in a recent Domain article, home renovations are currently at an all-time high in Australia so now is a great time to begin a new project.
3 – Seek Properties With Long-Term Rental Demand
You’ve no doubt heard the popular phrase “Location, location, location” being bandied about within the real estate industry, and for good reason too. Location is still one of the most important aspects of finding properties that can generate wealth, so when it comes to property investing during a recession, it is important to search for properties that hold the promise of future population growth and demand spikes that will help to grow your tenant pool.
Some common factors that contributes to spikes in population growth include neighbourhood activity such as upcoming new developments (commercial and residential), as well as infrastructure projects, employment hubs and new entertainment districts. Another factor to watch out for is the vacancy rate, where suburbs with a low vacancy rate of less than 2% are considered ripe for investment opportunity.
4 – Focus On Markets That Haven’t Peaked Yet
It pays to do your homework on areas of the market which are yet to peak and poised for significant growth. By keeping an eye on the news and local council activity, this can be a good early gage for future growth, and a way to earmark your ideal property before the demand curve surges.
Ideally you will want to find properties that are positioned at a price point that allows enough room for property value growth over time. Recessions provide a great opportunity to find more affordability in the market, which if done well, can set you up for great rewards in the future. Whilst many investors consider recessions a risky time to buy, they can in fact present sizeable opportunities to acquire property at prices that may never be as cheap ever again.
5 – Avoid Properties In Suburbs Tipped For Short Term Demand
As covered in our recent article Off-The-Plan Buyers Thinking Beyond Today the importance of long-term planning cannot be underestimated. When the market is uncertain, you can minimise your investment risk by avoiding properties poised for short term capital growth. Examples of this include mining towns or suburbs that are focused around periodical short-term demand, which may initially present attractive returns, but can quickly drop in values if the market shifts.
Areas with long-term demand have much lower risk. By investing in blue chip areas that are tipped for consistent rises in population growth, you can set yourself up for more sizeable gains and sustainable returns.
6 – Embrace A Long-Term Strategy
Whilst flipping properties for quick gains can be a profitable strategy when markets are buoyant and in a state of growth, this short-term style of investment can be high risk during a recession. When the market is unstable, it’s best to avoid looking at property as a “five-minute wonder” and adjusting your strategy for a long-term view that sets your investment up for gradual growth.
By embracing a long-term strategy and focusing on properties that are located in areas with high projected growth, you will position yourself for compounding growth and higher returns.
7 – Beware Of Over Leveraging In Unstable Markets
Whilst recessions can create scenarios of opportunity for investors, there is a risk of over leveraging. When markets are unstable, it is important to adopt a measured and considered approach to acquiring new properties to ensure they are not only within your budget, but also geared towards positive or neutral cash flow from the get-go.
Recessions can turn the real estate industry into buyers’ markets with bargains to be found left right and centre. The knock-on effect can lead to environments where investors have the opportunity to purchase multiple properties to introduce new cash flows from portfolios. There is however a delicate balance of seizing the moment whilst also avoiding the temptation of over leveraging, as the risk of negative equity or cash flows can easily follow, leaving you in a state of financial strain.
8 – Invest Below Market Value
Doing your homework on property values is one of the first considerations for any investor when considering an addition to their portfolio. With easy access to free property resources such as realestate.com.au, Domain or CoreLogic, median housing prices can be found within an area, to use as a benchmark for future investment strategies. It is here where astute investors can identify opportunities to buy properties below market value, leading to sizeable returns and property value growth for years to come.
As an example, the boutique apartments for sale at Paradiso are located in the affluent suburb of Como, which boasts a median house price of $905,000 due to its central, riverside and leafy location. With apartments starting from just $399,000 (a fraction of the median value) this presents a huge opportunity for investors to increase their capital growth potential in a suburb tipped for sustained growth in one of Perth’s most enviable locations.
An example of one of the boutique apartments at Paradiso
9 – Create Your Buffer Fund To Minimise Risk
Market fluctuations will always create potential risk for investors, especially in times of a recession or instability. The recent Coronavirus pandemic is a good example of how a global event can create mass uncertainty in the market, with the risk of vacancies and rental shortfalls being ever present. It is for this reason why investors should always have a buffer account set up to weather the storm of uncertainty, as this will take the pressure of fluctuations impacting your cash flow.
During COVID-19, investors have been given the opportunity to leverage support from banks and the Government Stimulus as a way of safeguarding their assets in a time of unprecedented instability. Setting up a buffer will always help you to reduce your dependence on market activity and will allow more flexibility in your investment strategy.
10 – Maximise Your Returns With A Well-Managed Property
Now more than ever, it’s essential to maintain your investment property to its highest standards to retain quality tenants and subsequent returns. In late April 2020 the Australian Government released moratoriums on residential tenancy evictions and a new code of conduct which encouraged collaborative efforts between tenant and landlord, with the end goal of ensuring properties were tenanted, investor finances were supported, and flexibility was offered in light of market instability. From these newly introduced laws we were able to see the benefit of working closely with your tenants to maximise returns.
If your tenant is struggling to pay, it’s always in your best interest to keep your property tenanted, so you may wish to negotiate parts of the tenancy contract to ensure this occurs. Ways of doing this includes adjusting the weekly rent amount according to the market (reduced rent is always better than no rent) whilst also talking to banks to see if they can introduce additional support to reduce your risk.
It’s not a question of “if” Australia will experience a recession in light of COVID-19 but “when” it will occur. This will inevitably impact the property market with price values expected to take a hit. However, as covered in our article Understanding Perth’s Property Market Cycles there are significant opportunities available to investors who know how to navigate the peaks and troughs of the market, with significant advantages in purchasing off-the-plan apartments in times like these.
It’s also never been cheaper to secure finance so now is the perfect time to begin planning your future investment whilst the market creates a bubble of opportunity that is there for the taking. Thanks to the developer at Paradiso, buyers and investors also have access to a series of incentives to help minimise the financial strain of acquiring one of these boutique riverside apartments, whilst setting you up for maximum future returns.
We welcome you to contact us today to find out more, or you can browse our range of incentives below.