Risk - how are you prepared for a drop?

Discussion in 'Investor Psychology & Mindset' started by hammer, 20th Nov, 2016.

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  1. hammer

    hammer Well-Known Member

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    Been seeing lots of threads...this market will go up!....no, no...It's all going to crash!!!! Run!!!

    But after reading this forum for over a year it's clear that the people who are really good at investing seem to choose the best place they can then just budget for a crash and forget about it.

    So how do you allow for things to go pear shaped whilst still permitting a great return whilst the going is good?

    What is your risk mitigation strategy?
     
  2. Perthguy

    Perthguy Well-Known Member

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    1. Buy in rising markets
    2. Add value to generate positive cashflow
    3. Lower LVR
    4. Good cash buffer
    5. Sell at a peak

    But there are some properties that are part of a long term hold. I have had properties fall in value but nit negative equity yet. If a property is cashflow positive, negative equity is not a huge concern for me.
     
  3. Sackie

    Sackie Well-Known Member

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    1. Bmv
    2. Add value potential
    3. High to growing demand location to live due to established and or increasing growth drivers being established
    4. Good demand location to rent
    5. Exit strategies
    6. Estimated 7-9 o'clock buying
    7. buffers
    8. Manage LVRs and cash flows
     
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  4. jins13

    jins13 Well-Known Member

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    Heaps of research prior to purchasing the property and being able to identify what may happen to the area for current and future events ie new hospital being build, university, roads and etc.

    Have heaps of buffer as other people mentioned but I think there is also an obligation to our employer or for ourselves to continually improve our skill base to ensure that we are not obsolete and employable. Sometimes it's too easy to get too comfortable and stop learning but what will happen if you lose your employment today?

    But I am a hypocrite because I certaintly do not have much of a buffer to fall back on and shouldn't have that false sense of security that the job is always going to be stable.
     
  5. MTR

    MTR Well-Known Member

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    My risk strategy has been to buy in strong markets by this I mean markets that are rising so within 12 months you have made money and my exit strategy is to sell down some properties prior to peak to reduce debt rather than access equity. The reason I don't like to access equity and hold all IPs is because I don't want to be paying debt/interest to banks when market has turned and have to wait 7 years for the next boom cycle.

    This also allows me to use the cash and find other moving markets while increasing cash flow. Its not 100% guaranteed but so far in the main been working for me.

    MTR
     
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  6. wombat777

    wombat777 Well-Known Member

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    On a Capital and Income Growth Safari
    1. Investment properties are cashflow+
    2. Bought them in a rising market
    3. Keeping the portfolio LVR at or below 70% ( includes PPOR )
    4. Buffers sufficient to keep me going for several years
    5. Redundancy package would be 12 months salary
    6. Income protection insurance

    My rationale for the income protection insurance is that I minimise how much I eat into buffers or redundancy package if I do lose my job.
     
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  7. Ace in the Hole

    Ace in the Hole Well-Known Member

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    Big bad buffer.
     
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  8. The Y-man

    The Y-man Moderator Staff Member

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    What sort of crash are we talking about here?
    Are we talking about a rent crash - i.e. rent prices to fall?
    and/or a job market crash?

    The Y-man
     
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  9. MTR

    MTR Well-Known Member

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    Something else to consider when markets fall rents can also fall

    OMBad....:).
     
  10. kierank

    kierank Well-Known Member

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    When you get to my age (60+), you have seen it all before. Bought first property 35 years ago; bought first IP 24 years ago and still own it.

    Just have to ride out the storm, if/when it comes. Weathered a few cyclones over the years, in property, in shares and in business. IMHO, the best decision is 'no decision' while you are being battered. No point running outside and getting hit by flying debris. Too late to fortify your castle after the storm has started.

    Risk Strategy:-

    1. Turn off TV/radio and don't read newspapers/magazines so I don't see/hear/read the negative news.

    2. Buy a better class of Shiraz to deaden any stress/pain.

    Oh, I nearly forgot - got cash buffers sitting on Offset Accounts. Just in case there is a good buying opportunity.
     
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  11. Biz

    Biz Well-Known Member

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    Hard liquor.
     
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  12. MTR

    MTR Well-Known Member

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    Lol. Suggestions?
     
  13. ellejay

    ellejay Well-Known Member

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    I did it by keeping a lowish lvr so we always had cash available. Now in the low 60s and heading down.
    Selling selected ips after they've had a good run with nothing more on the horizon for a while (because local wages etc wouldn't support much of an increase). Sold 3 this year.
    Paying down debt on higher yielding safe rentals and enjoying comfortable cash flow. Living within our means and enjoying life without too much sacrifice.
    When buying low yield property- has to be a rising market or a market that's crashed and I can afford it at this point in time only, and/or has scarcity value. For me I prioritise having a buffer for these so that they don't impact my financial freedom, and I can hold them if desired during a downturn.

    I've held a property for about 9yrs or so through a crash. Great educator. Things that made this okay were:
    interest rates below 1%
    constant good tenants in place = no vacancies or missed rents throughout (low vacancy rate and good quality tenant pool is king when buying).
    Cash buffer-worst case scenario I could have paid the mortgage the whole time without tenants if needed
    It was a cycle, the market picked up and I sold without a loss.

    Imagine if I was holding a number of these though in a market with higher vacancy rate and/or much lower socio economic/problematic tenant pool (general statement) AND no buffer AND/OR we lost our jobs. Not at all exciting but you need to build in a risk strategy in the event that all goes bad. In my case I haven't pulled an equity out of my properties and they all have at least 20% equity. I upped our salaries to the max and saved for deposits by doing the mrmoneymustache thing (not extreme version).

    Anyways, boring way of doing things but I'm still able to keep buying and taking advantage of opportunity thanks to this strategy, and basically working when I feel like it.
     
  14. ellejay

    ellejay Well-Known Member

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    Missed that off my list. Plenty of rum and coke, G&T. I'm flexible :)
     
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  15. See Change

    See Change Well-Known Member

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    Buy early as a market is about to or starting to rise . Am happy to buy some when the market is crap if buying in good positions , but only lowly geared at that stage .

    I have JOB ...... which I'm happy to keep on doing .

    Large LOC's with buffers .

    When market moves up , sell , take profit , pay tax ( yes ... ) and either pay down debt or buy other properties outright in areas yet to move .

    Cliff
     
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  16. RetireRich101

    RetireRich101 Well-Known Member

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    1. be good to Dad
    2. else, be good to Mum.
     
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  17. Ace in the Hole

    Ace in the Hole Well-Known Member

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    Or just forget the rum and go straight to the coke.
     
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