What does Mike Tyson, Black Swans and COVID-19 all have in common with Property Investing?
Ok. I admit I am drawing a pretty long bow when it comes to the headline but bare with me. In the 16th century all historical records of swans described them having white feathers. Therefore a black swan was thought to be impossible, or non-existent. However, in 1697 Dutch explorers led by Willem de Vlamingh became the first Europeans to discover black swans in Western Australia. Thus the "black swan theory" was coined.
Enter Mr Covid-19. This was and is the event that no-one thought possible. The Black Swan Event of our lifetimes. I still remember underplaying it at the start. Writing it off as nothing more than the common cold. A good friend of mine cautioned me in the early stages saying this goes from "zero to 100 real quick". How right they were.
Alright Matt. We get it. Covid-19, swans, history lessons. Where does Mr Tyson come into all this. Well, when Mike Tyson was asked by a reporter about his upcoming fight with Evander Holyfield he replied with his now infamous quote:
"Everyone has a plan until they get punched in the mouth"
Mike Tyson
I feel this is quite appropriate for the current scenario we are all going through. The most astute investors would not have had a "Coronavirus pandemic plan". It is the unknown unknowns that are our biggest risk when investing. For me I never know what is around the corner. This is why I have always attempted to plan for the worst case scenario. Every investor should have a deep understanding of their risk profile and their exposure levels to various shocks that may occur over their investing life. Remember property investing is a long term game. It is highly likely there will be multiple Black Swan events during this time. The best we can do is attempt to weather the storm using appropriate buffer mechanisms we have put in place prior.
I try to run my investment portfolio the same way I would run a business. It has always been business's with strong financials that ride through these difficult times the best. There are a few small decisions that I've found to be lifesaving during this pandemic. Examples of these are:
Avoiding highly negatively geared properties - I like my investment properties to have decent cashflow. There's arguments that there is superior capital growth experienced in these highly negative investments however for me it affects my "sleep at night factor".
Having cash buffers in place - I utilise offset accounts to store some spare cash. This works by offsetting the interest on our loans whilst maintaining liquidity. These funds are purely there for an emergency if needed. A "rainy day" fund so to speak.
Budgeting for higher interest rates - Personally I budget for around 6% interest rates on our loans. Even when paying circa 3-4%. Historically interest rates have shown a long term average of approx 6%. I'm fairly sure low interest rates are here to stay. Unfortunately "pretty sure" just doesn't cut it when putting in place plans like this.
Plan for higher vacancies - I always have a built in vacancy buffer for our properties. I look to have minimum 4 weeks vacancies built into our cashflow. However I do look to increase this each year. In times like this when job loses are rife, tenants unable to meet rental repayments are quite common. Having this buffer certainly cushions the blow if this were to occur.
These are just some of the ways in which I attempt to make our portfolio "Black Swan Proof". Some can even be applied to regular home owners with no investment properties. It is good practice to get these systems in place. No one could have seen this event coming and the impacts it has have. In no way am I suggesting it is entirely bulletproof. Some of the best business structures and seasoned investors are getting tested during this. But it is a way of essentially buying you time. Ensuring that you come out the other side, albeit a little battered and bruised. Many others who don't have these systems in place will not be so "lucky". Remember - You fail to plan you plan to fail.
- The Tattooed Investor