Unprepared property investors could face a cash flow crisis in the coming 12 months, Michael Hutton, head of wealth management at HLB Mann Judd Sydney, has warned.
“Property investors who have made their investment decisions on conditions that have prevailed in recent years could well find they are financially over-stretched if the residential property environment changes in the way economists are predicting.
“Geared investors should always have a medium term cash flow plan that covers likely events, as well as unforeseen circumstances, such as tax changes like those announced in this year’s Federal Budget.
“For instance, what happens to their ability to service debt if interest rates rise?
“What happens if a property remains untenanted for an extended period? How will the changes to the depreciation rules affect cash flow?”
Mr Hutton says there are a number of changed circumstances that can hurt heavily geared property investors, and they should all have robust cash flow positions to help them manage the impact of such changes.
“History tells us that the story of property crashes, large and small, is always much the same. It’s not a reduction in value of property or a downturn of property sales or construction that causes investors to lose assets. These are simply influences or by-products.
“The reason people lose their property portfolio is usually an inability to service debt, resulting in them losing control of their properties.
“Investors who can hang on in the rough times almost always come out smiling when conditions bounce back again.
“To get through the rough times and maintain their ability to service debt, however, astute investors know how to manage their finances and differentiate between cash flow and paper wealth and expected income.
“For many residential property investors, understanding cash flow and making sure that debt can be serviced throughout any property downturn and interest rate increases, is likely to be the difference between financial success and failure over the longer term.
“The current outlook also suggests it is not the time for investors to be overstretching themselves,” Mr Hutton said.
HLB Mann Judd Sydney is a firm of accountants and business and financial advisers, and part of the HLB Mann Judd Australasian Association.