5 Ways to Protect the Wealth of Your Property Portfolio
When you start purchasing and investing in property, your property portfolio will steadily grow. As you accumulate more and more properties, you will come to realize that property investing is as much about liquidity as it is about choosing properties, managing your tenants, and arranging finance.
The main thing that you need to do is to ensure that you are able to access cash to feed your portfolio and enable it to grow.
Here are 5 ways in which you can protect the wealth of your property portfolio:
#1 – Income protection insurance
If you are a negatively-geared property investor who is a contracted employee or who is self-employed, it means that your salary does not have the same stability or security as someone who is a permanent employee.
One risk management strategy that you can employ to maintain the stability of your income is to take out income protection insurance.
This way you can ensure that you will continue to receive a certain income if you suffer some sort of decline, or if you are unable to work. Income protection insurance covers you for such things as disability or disease.
#2 – Landlord insurance
There are many horror stories out there about tenants who trash units, who have not been able to pay rent for months on end and in the end, take their entire belongings and leave in the middle of the night.
Not only does this cause extra costs in repairs, but it also delays the collection of future rent due to the time allocated to fixing the unit.
Prevention is always better than cure: landlord insurance offsets the costs of a bad tenant. This can mean the difference between bad tenants causing minor disruption versus large cash black holes. The premiums for landlord insurance is tax deductible as with income protection insurance.
#3 – Lock in your interest rate
Even though this isn’t such a popular feature in South Africa, real estate investors often try to beat the marketing by second-guessing future interest rates by locking in fixed insurance rates.
The gamble here is that the fixed rate that you lock in will be lower than future variable rates for the period for which the rate is fixed.
‘Betting’ on the interest rate moves is a speculative venture and trying to predict 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 what your bond repayments will be for a given period of time is a great way to manage risk.
#4 – Use a trust
Trusts are a great way to protect your portfolio and it offers many protective benefits.
If you have debt enforcement taken out against you or if you go bankrupt, assets that you have in a trust will be sheltered from such action. You will also be able to distribute income on a basis to minimise tax liabilities.
From an assets 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.
#5 – Get a prenuptial agreement
Many lawyers recommend that their richer clients opt for a prenuptial agreement.
After all, in an ideal world, prenuptials are not be needed, but in the real world, the truth is sadder than this and it is something that’s highly recommended. The choice, however, remains yours.
Statistics show that divorce rates are at an all-time high. As a serious property investor, it would really be in your interest to opt for a prenuptial agreement.
Especially if you don’t follow the what’s-mine-is-yours rule, then it is advisable for you to sign such a contract.