How To Recession Proof Your Property Portfolio
Recessions are a part of life and bound to happen sooner or later, so it’s important to learn how to recession proof your portfolio
Ryan: There’s always something in the news about property bubbles or the market’s going to burst or there’s a recession on the way. And so, today, we wanted to talk about how you can actually recession proof your property portfolio so if something bad does happen to the market in the future, you know you’re protected. And because the fact of the matter is, recessions are some of the best times to buy property.
The property market goes down, you can get great value for properties. You can get cash flow. So you want to be in a position, when a recession hits, that you can buy. So today, I have with me none other than Ben Everingham, the buyer’s agent.
Hey, Ben, how’s it going today?
Ben: Good day Ryan, how are you going?
Ryan: Yeah, good, thanks. This is something that we’re really passionate about because we want to set you guys up for a win no matter what the market does. We don’t want you to just be successful if the market goes up. We want to prepare you for everything. And so today, we’re going to be talking through how to recession proof your portfolio.
First, let’s talk about what are we talking about when we say “recession”?
Ben: Cool. So you and I were talking about the technical term in a recession before and we were kind of laughing about it’s not really relevant at all to the people in today’s podcast or videos. What I thought we would say a “recession” basically is when property start to stagnate or start going backwards in any particular area or market, state or country as a whole.
Ryan: Yeah because there is technical terms for recession which relate to the GDP of a country and stuff like that. But, if you’re a property investor, you’re probably not too fussed unless your property is actually losing value or not going up anymore. So we thought we kind of define recession, just for the purposes of this talk, as when the property market is stagnating or going down.
What are some strategies that we can use to protect ourselves if, you know, a recession does hit?
Ben: So, I think the number one thing to protect yourself is just making sure you’re in a comfortable cash flow and equity position across your portfolio. It’s a no-brainer, you and I talk about this all the time, to not be over exposed.
I would say now is probably not the time to go out and get that 105% loan that people are still getting every now and then or even the 95% loan, unless you’re buying significantly below value; which is pulling your LVR as a whole down.
What we’re trying to say there is at the end of the day, if a recession does come at some point in the future in Australia or anywhere else in the world, it’s pretty difficult for prices in the right area to drop any more than 15% or 20%, absolutely max. Which means, a comfortable position might be an overall loan-to-value ratio of around about 80% mark.
Ryan: Yeah. So what we’re kind of saying there is that you need to prepare for these scenarios and not just think about best case scenario. Because I feel like often, when we’re investing, we get so excited about all the money we’re going to make and how good it’s going to be and how we’re going to grow our portfolio in the next 12 months and then be financially free. But, leverage can bring great power and can make you heaps of money, but it can also work in the opposite direction if the market moves the other way.
And so, being leveraged with 100% or 95%, as soon as you start losing money, you put yourself in a negative equity position, which can be really dangerous if banks come knocking and they want to sell your property and you can’t sell it for the amount you’re loan is worth.
I guess, we’re just saying be protected against that and also consider your cash flow position. So if you’re highly negatively geared and if something like this does happen, if you lose your job and you can no longer afford to pay your mortgages, then that puts you in a difficult position as well.
Ben: From personal experience, about 3 years ago, I made a big mistake. I think I’ve had a laugh with you about this before, maybe not. I don’t know if I’ve told you about this property. Probably not because it wasn’t the best one I ever bought.
I basically bought a piece of land in regional New South Wales completely against everything that I believed personally because somebody that I really trusted who I’ve done some stuff with in the past said, “This is a great area. We can’t lose. There’s an easy $100,000 in the deal to move it on in 6 months.” My eyes lit up like anybody else’s and I’m like, “Oh, easy money. Sounds great.”
Ryan: I’m guessing you didn’t do as much research as you probably would nowadays.
Ben: These days, there’s about 250 things that I consider before I even look at an actual property in the suburb. But in that particular time in my life, I was working a corporate job full time, as you know, and working big hours. I was like everybody else that only had between 1 and 5 hours a week to focus on my research side of things. So my research wasn’t where it is today.
So I was thinking, “Yeah, this looks great. What’s the worst case scenario? I’m going to make $50,000.” It still looks good on paper. So I brought one of my good friends into the deal as well, which was another massive mistake. And so, we bought this piece of land and by the time we’d locked in, the piece of land settled on it was about to start construction, I’d actually realized what I got us into.
Ryan: Which was what?
Ben: Basically, a guaranteed loss. Unless, we were going to hold it long term, which was not the intention.
Ryan: So why was it a guaranteed loss compared to what you did on paper and what actually happened in the market?
Ben: Nothing happened in the market at all. What happened was I didn’t do my research properly. So, looking back now, the market had an average time on market or the average time it took a property to sell was 300 days. Immediate no-no. Another immediate no-no red flag was there was only 40 sales per year in that market and the average sale was $250,000 where I was trying to sell this property $400,000, which meant about once every 3 years, there was somebody in the town that could afford to buy it from me.
Ryan: How big was this town in population, do you know?
Ben: I’ll tell you where it is. It’s a town called Kyogle in New South Wales. It’s basically straight out the back of Tweed Heads there. It’s a beautiful part of the world, absolutely gorgeous property that we built. But, just made all of the mistakes.
I thought I was hustling the developer and got this great deal on the land. We bought the land for $100,000. Again, we bought the land for $100,000, put $270,000 into the build. Again, massive no-no. You want the value of your property being the land component, not in the construction component.
So we learned all these things. But, long story short, I thought I’d be able to sell it off the plan because, you know, that’s what I thought. And then, I couldn’t sell it off the plan because no real estate agent knows how to sell off the plan except the property marketer.
The second thing that happened was we completed construction. The construction took 28 weeks instead of 14 so we had all these holding costs. And then it took us 3 months after construction to sell it. We originally listed the property at $390,000, ended up selling it for $330,000. I think it ended up owing us $37,000, which we’re never going to get back again. So that was the biggest mistake I’ve made and that was not even in a bad marketplace.
Why I’m telling this story is because this happens all the time to people. In a good marketplace I was lucky enough to find a buyer that could afford to take it off our hands for that loss. But, in a worse market, we could have been absolutely stuffed.
Ryan: Yeah. So, basically, what we’re saying is try not to get yourself in that position. You actually want to do the opposite and get in a position where your property is worth more than what you paid for it. Either by buying under market value or potentially doing something to improve the value of that property. We’ve had previous episodes where we talked about this. Things like renovations, cosmetic renovations, adding a room to the property.
There’s a whole myriad of different ways that you can add value to the property. But, I guess, what we want to talk about – what we’re trying to get to is that try and put yourself in a position where you do have that kind of buffer in terms of equity. So if the market does change on you, then you’re not in a position like Ben where you’re selling your property and you’re actually making a loss and you’ve got to cough up the cash to pay off the loan because the property didn’t sell for what you thought.
I think another good thing to talk about after that because, obviously, you bought in a regional area, you had a property that was, like, at the top of the market for that regional area. Which is another big no-no because when a recession hits, the top of the market seems to be the area that moves down the fastest. Often, you see in booming markets, the top of the market does really well.
But then, as soon as the market cools off, the really pricey properties tend to be the ones that fall the earliest and also fall the hardest. So, really, when it comes to recession proofing your portfolio, those bread-and-butter properties that are the median of the market that most average people can afford are going to withstand a storm a lot better.
Ben: Absolutely. I’d like to say, in terms of fleshing out what a bread-and-butter property might look like, we talk about this all the time. I think high quality metro market. If you can’t afford a metro marketplace, then a high quality regional marketplace, which might be Ballarat and Bendigo to Melbourne.
It might be Wollongong and New Castle to Sydney or the Central Coast. It might be Gold Coast and Sunshine Coast to Brisbane type thing. But, a high quality marketplace where, you know, the reality is, nothing’s going to last forever.
The good times don’t last forever. The bad times don’t last forever. People are positive, people forget about things and that’s why the same thing keeps happening again and again, once every 14 or 15 years.
But, that bread-and-butter property that’s below the median price point that you bought below market value in a suburb where there’s a high percentage or owner occupiers and not too many renters. Which means if people do get into financial difficulties, you’re not 60% of the people in the suburb aren’t all trying to sell at one time. It’s more like 5% of people type thing. And so, it doesn’t actually have any meaningful effect on prices.
Ryan: Are you saying because the majority of the people own in that area, if hard times hit, they’re less likely to sell their property than investors? So if someone owns the home and lives in it, they’re less likely to sell it than someone who’s just invested in it.
Ben: You look at the data over the last 50 years and the 3 or 4 recessions that we’ve had over that period of time, owner occupiers will do anything they possibly can to keep a roof over their own head. And you’ve got to remember, Aussie home loans 3 weeks ago came out and said that across the board, the average loan-to-value ratio in the properties that they held of the loans that they’ve got in the marketplace are below 70%. So that’s an extremely good position.
When you talk about the American banks in 2007 that were leveraged up to sometimes 40 or 50 times the debt against their books. I just want to get this across. I don’t personally believe that we’re going to come into any issues in the immediate future.
This conversation is about, you know, how can you set yourselves up knowing that something is going to come, you know, let’s call it in the next 5-8 years and when that time does come, to make sure that you’re in a strong financial position to protect yourself and not be like me that had to sell Kyogle out at a loss.
Ryan: Yeah. I think what we also want to help people avoid is just that fear that comes over them and then they do nothing. Like, I recently did an interview with Steve Keen and he has beliefs about a massive property crash in Australia, which may or may not be true. We don’t know. Obviously, the future will tell. But, he didn’t really have anything that was like, “Well, here’s what you can do to prepare for something like that.” Or, “If the market does crash, here’s how you can take advantage of that.”
He was just kind of like, well, here’s what I think is going to happen in the future. And with no solution, most people just get fearful. I get emails from people all the time that say, “I’m ready to invest” or “I want to invest, but I think the market’s going to crash 50%, so I’m just going to wait until that happens.”
But, what if that doesn’t happen? What if the market continues to go up? It goes up for another couple of years and when it does drop, it only drops a little bit. Do you know what I mean? So we want to give you guys things that you can take action on. But also, put you in a position where if something does go awry, you’ve invested in such a way that you can weather that storm and you’re in an awesome position to go and get those deals and take advantage of a bad market. Because bad market can be a great time to buy.
Ben: Look, I honestly think the best time to buy. There’s 2 things that happen over an 18-year period. So there’s this guy that I’ve talked about you before, named Phil Anderson.
The cool thing about Phil Anderson is he’s actually rich as hell and he’s a person that doesn’t just spruik about this stuff, but has made it. You know what I mean? He’s a private wealthiest economist in Australia and made an absolute fortune shorting the GFC.
There was that movie called, “The Big Short” that I’m sure some people have watched.
Ryan: Yeah. I just recently watched that.
Ben: How awesome is it?
Ryan: That was a cool movie to watch and to see what was happening and how crazy it was. It was insane.
Ben: I mean, for any of the girls listening to this podcast or video, Brad Pitt. Who else was in it? Christian Bale, about 3 other heartthrobs. Like, just for eye candy’s perspective it was sick.
Ryan: Ben was loving it.
Ben: Yup. I was loving it. My wife was loving it, which meant I was loving it. What this guy did was he looked at the last 200 years of global economic history. The point that he first started to look at was from the time central banking came in. Because there’s been this very, very consistent market cycle over time based on American land prices. We don’t have to get into the details, but what he did find is that over an 18-year period, 14 years are relatively stable.
If you looked at a graph that would be relatively upward. Obviously, there’s flat years, there’s backwards years, but the trend is up. And then, for 4 out of the 18 years, there’s a crash. And the last crash we had was between 2007 and 2011. He estimates that the next major crash will be starting 2025 will be the very top. 2026 is when times are going to get very tough.
He also believes that the opportunity to make money over this next stage of this cycle is going to be unprecedented in history and there’ll be more millionaires created through property and businesses than any time before. So with the biggest crash in history, there is also the biggest boom leading up to that.
I’m not saying that he’s right because I have watched your stuff with Steve Keen and Steve McKnight and they’ve got extremely valid points. But, he’s worth 50 times what they are and he was the one that saw it coming. He saw the 2007 crash come in 2005. All of the investors that follow him were in an extremely strong position to be able to take advantage of that marketplace and all made fortune during that opportunity.
What’s happening at the moment is because things have been so solid for so long. Between 2019 and 2021, it’s going to be the mid-cycle slump, is what he calls it and he wrote an incredible book.
I absolutely recommend going and listening to his stuff, Phil Anderson. But, there’s going to be this mid-cycle slump. The majority of people that aren’t educated are going to think it’s a tough time coming. It’s an amazing buying opportunity to ride the rest of the wave after 2021 to 25.
All we’re trying to say today is be careful, be cautious. Listen to what’s happening in mainstream media, but go and listen to the people that are actually worth $1 Billion that make the money out of these cycles. Sometimes, people in the property industry aren’t the most educated people in the market.
The guys in share trading, they live and die by their sword on the daily or a monthly basis having much better set of indicators to identify something before it actually happens for the average person. Following guys like him as well as everybody else at Ryan has talked to and keeping abreast of what’s going and the setting yourself up to make or take advantage of the opportunity is huge.
Ryan: Yeah, totally. That’s exactly where we want you guys to be – to be in a position where you can take advantage of that opportunity. But, then also to be protected somewhat against things that can happen in the market as well.
Was there anything we missed out on? Did we talk about cash flow and being in a good cash flow position where if something does happen, at least – I think we talked about that in the beginning, didn’t we?
Ben: Yeah. I suppose it’s a no-brainer. You want positively geared properties or at the very least, neutrally geared properties when this happens. Because worse case scenario, you temporarily lose your job for a couple of weeks until you go and find a new one.
You know, if it’s not costing you anything, interest rates don’t historically go up during recessions dramatically in a short period of time. So, if you’ve got a buffer there of, let’s say, the pre-tax holding cost on your average property is $5,000 a year and you’ve got 2 or 3 years worth of savings sitting against the property when a bad time comes.
You know, at least you’ve got a buffer in place to protect yourself so that you don’t have to offload that property in a marketplace where no one except people like Ryan and I are looking to buy.
Ryan: That’s one thing that we didn’t talk about, is actually having a savings buffer. I think most people do live week-to-week in terms of their life, in terms of their pay check and I feel like most investors do the same when it comes to their property portfolio. They’re waiting for the rent to come in in order to pay the mortgage. Do you know what I mean? But I know you’re very big on having a savings buffer. Do you want to talk a bit about what you recommend for that?
Ben: Yeah. I wasn’t always like this. Let me just say that. The first 6 properties I bought, I literally put everything on the line. I didn’t even have the money to settle on those properties. I’ve been the guy that’s been fully overexposed and now I don’t want to be that guy again.
I’m not talking about having tens of thousands of dollars in savings buffers because let’s face it, most of us don’t have the ability to continue to live the life that we want to lead and also save that money without touching it. But, for those of you that might have a property that’s neutrally geared before tax and then at the end of the tax year, you get $4,000 or $5,000 back. Rather than putting that money into your own account, chuck that money and offset account against the property for a rainy day.
Let’s say that from now until 2025 there’s 7 or 8 years. $4,000 a year stacks up to give you a situation where you’ve got deposits if you want to use them in a poor environment. Or, you’ve potentially got a good buffer to get you there through 2 or 3 really hard years, if it even happens.
Ryan: You can use an offset account in order to do that, as Ben was saying. So rather than paying off loans completely and not having access to that money if something happens, utilizing an offset account to give yourself a buffer either to jump into the market or to give yourself a buffer if you actually need to use that money to continue paying for your property portfolio.
Ben: I wanted to add something to that, actually, because if you aren’t in a situation to save and there was plenty of times in my life where I didn’t have an ability much more money than I was spending per week. Then, if your property has got some equity in it and you know that in 2026, 25, things are going to be a bit tough, maybe in 2024 if your loan-to-value ratio is good, re-finance at that time 5% of the equity out of the property and don’t spend it.
Just have it sitting in a savings account next to the property that, again, if things come, worse comes to worse, you’ve got a little buffer sitting there that you can use to get yourself out of a tight cash flow position. Because there’s an undersupply of available properties for rent in great suburbs in Australia, even if we go through the worst environment, rents are only going to drop by 10% in blue chip suburbs.
You know, the vacancy rates, people still need a roof over their heads. So if it’s the right type of property in the right environment, the effect even in a bad marketplace is temporary if insignificant at all.
Ryan: Yeah. That’s something that I actually got out of the talk with Steve Keen as well, who was talking about the market and stuff like that. He was saying that no, rents don’t drop as much because rents are directly tied to people’s income.
Whereas, property prices are tied to how much actually you can borrow. And so, if the market does go down, if you’re in a good cash flow position, your rents are unlikely to go down as much as the market will so you should still be in a decent position as well. Or, if you just have that little buffer to offset some losses, then that should help you out.
I think we’ve covered everything that we wanted to cover in terms of recession proofing your property portfolio. What we wanted to get across to you guys is obviously, listen to what people are saying out there.
Listen to the most educated people about markets, which probably isn’t going to be us in terms of day-to-day what the market’s doing, when it’s going to change significantly in terms of a market crash or whatever, we’re not economists. But, when you make investment decisions with the next property you purchase and things like that, have a think about the future 10, 20 years down the line and have a think about those periods of time, which will come, where the market isn’t booming and it’s not best case scenario and how can you protect yourself against that, but also take advantage of those opportunities when they do come – because they are opportunities.
Ben: Yeah. You don’t want to be that guy. Like, I’ve got this guy that I’ve been writing this blog for 4.5 years. He’s a really nice guy. 4.5 years, he’s been touching base with me freaking about stuff. In that 4.5 years, every property that I’ve owned has increased by at least 7% per annum and given me 6-7% rental yield. My net position as a result of acting over the last 4 years as opposed to doing nothing, which is what this guy’s been doing, is significantly better.
Just because you’re uneducated and not following the right people or have the finger on the pulse in the right way let fear stop you actually making money. Because there’s absolutely money to be made right now in the right markets in Australia. Just because Sydney is expensive and topped out, every economist in Australia said that Sydney was done, that it was going to go backwards. To this year today it’s done 9.6%. Melbourne’s done 8.5% or 9%. People honestly have no crystal ball. None of these people have any direct idea of what’s going to happen.
They’re just all predicting. And sometimes, they have a vested interest in it and sometimes they’re just looking to help people. But, take it all with a grain of salt and just protect yourself for the worst case scenario if it comes up.
Ryan: I think what I love about the way we teach and what we do is that we don’t try and be an economist and predict the market’s going to do this exactly in the next 2 years. I know when you’re talking to your clients, you give really low predictions in terms of capital growth over a long period because it’s better to be safe than to just say, “Yeah, things are going to go great.” But, what we are really good at is researching and finding those fundamentally good areas that where the properties are likely to grow.
Where’s a good solid suburb and things like that. So, we don’t know the exact market trends in terms of it’s going to go 8.4% or whatever it is. But, we do know how to find good suburbs and how to find solid suburbs that aren’t likely to go down significantly or anything like that.
We’ll leave it there, guys. I hope that this has encouraged you to go out there and take action. If you want help finding properties yourself, I do have a course on that inside my membership program at onproperty.com.au.
You can check out how to research suburbs. Or, if you want someone to actually help you find good suburbs and to help you take that next step and invest, then Ben is a buyer’s agent and he does work with 10 people a month in order to purchase these high quality properties. So, if you’re interested in working with Ben, then he is offering a free strategy session to On Property listeners. So head over to onproperty.com.au/session and you can read about that session there and also book one if you’re interested. Head over to onproperty.com.au/session to book a session with Ben.
We’ll leave it there today, guys. Thanks so much for your time and your insight today, Ben.
Ben: Thank you very much, Ryan. Thanks for listening.
Ryan: Alright. Until next time, guys, stay positive.