Eight ways to protect the wealth of your property portfolio
Category Investing
You have accumulated your property portfolio, and have discovered that property investing is as much about liquidity as it is about choosing properties, managing tenants and arranging finance. You need to ensure you are able to access cash to feed your portfolio and enable it to grow.
1. Income protection insurance
If you are a negatively geared property investor who is a contracted employee or is self-employed, your salary does not have the same stability or security as a wage earner who is a permanent employee. One risk-management strategy is to maintain the stability of your income is to take out income protection insurance. This ensures you continue to receive a certain income if you suffer a decline or inability to work. Income protection insurance covers you for such things as illness or disability.
2. Landlord insurance
We have all heard horror stories of tenants who trash rental properties, become months behind on the rent and skip the premises. This not only costs investors in repairs and lost rent but also causes delays in collecting future rent, because of the time required to get the property in order. Prevention is better than cure. Landlord insurance offsets the cost of a bad tenant. This can mean the difference between bad tenants causing minor disruption versus large cash black holes. As with income protection insurance, the premium for landlord’s insurance is tax deductible.
3. Keep a buffer
The easiest way to ensure you can get cash quickly is to have some on standby. There is no substitute for cash, it is the most liquid asset and a ready supply is one of your best risk management measures.
4. Lock in your interest rate
It is something of a game for seasoned investors to try to beat the market by second-guessing future interest rates by locking in a fixed interest rate. The gamble is that the fixed rate you lock in will be lower than future variable rates for the period for which the rate is fixed.‘Betting’ on interest rate moves is a speculative venture and trying to forecast future interest rates is far more difficult than choosing a good property investment. The real benefit of fixing your interest rate lies in giving you certainty. Knowing your bond repayments for a given period of time is a great way to manage risk.
5. Use a trust
The protective benefit of a trust for a property investor is that if you have debt enforcement action taken out against you or you go bankrupt, assets in which you have an interest via a trust (including properties) will be sheltered from such action. There are other benefits of a trust, most particularly the ability to distribute income on a basis to minimise tax liabilities. From an asset protection point of view, the value of a trust is the risk associated with the debt or liability used to acquire an asset. This can be managed by virtue of being quarantined within a trust structure.
6. Get a pre-nuptial agreement
Many lawyers recommend asset-rich investors get a pre-nuptial. In an ideal world, pre-nuptials will not be needed, but in the real world it is highly advised. The Justice Department’s 2012/2013 annual report declared there was a 28% increase in new divorce matters. The choice is yours. If you believe your relationship will last, do not get a pre-nuptial. If you want to ensure the on-going ownership of your properties, push for a pre-nuptial.
7. Ensure you have an up-to-date will
Nobody must be without a will. As an investor, you need a will to ensure your assets are distributed as you wish. Not only does it give you peace of mind, but also for your loved ones as you can ensure clarity around who gets what.
8. Buy cheaply
You make your money when you buy rather then when you sell, however, another aspect of this adage, is that buying at a bargain price is an excellent way to cut risk.The reasons are obvious: you part with less capital, accumulate fewer liabilities and you set yourself up for cash return at a higher yield relative to purchase price. Also, if you are able to buy at a discount to market you have, in effect, created immediate equity which has its own risk management value. www.privateproperty.co.za
Author: Privateproperty.co.za
