Asset protection and your property portfolio

BY JASON VORSTER - JUST INVEST, PART OF THE JUST PROPERTY GROUP - JANUARY 30, 2015

Creating a substantial property portfolio can be a lifetime's work, so serious investors need to know how to keep their assets safe.

You've accumulated your property portfolio, investing and borrowing while you're working, using capital growth and rental returns to build your empire. The issue now, as you contemplate transitioning to financial independence is not how to build wealth, but how to keep it. 

You will have discovered as an investor, that property investing is as much about liquidity as it is about choosing properties, managing tenants and arranging finance. You need to ensure that you're able to access cash to feed your portfolio and enable it to grow. Here we'll look at the ways to protect your wealth and keep your portfolio safe. 

Income protection insurance

If you're a negatively geared property investor who's self-employed or contractually, your salary doesn't have the same stability or security as a wage earner who's a permanent employee. One risk-management strategy you can put in place 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. 

Landlord insurance

We've 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. 

While prevention is better than cure, landlord insurance offsets the cost of a bad tenant. This can mean the difference between a bad tenant causing minor disruption versus a large cash black-hole. As with income protection insurance, the premium for landlord's insurance is tax deductible. 

Keep a buffer

The easiest way to ensure you can get cash quickly is to have some on standby. There's no substitute for cash, it's the most liquid asset and a ready supply is one of your best risk management measures. 

Lock in your interest rate

It's 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. 

Use a trust

A trust is a legal entity that can own property: it has beneficiaries who are the people or entities to whom the returns of the investment owned by the trust are distributed. A trust will also have a trustee who, in a discretionary trust, will distribute the investment returns as he or she sees fit. 

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 of course, properties) will be sheltered from such action. 

There are other benefits of a trust as well, most particularly the ability to distribute income on a basis to minimise tax liabilities. But from the asset protection point of view that we’re interested in here the value of a trust is that the risk associated with the debt or liability used to acquire an asset can be managed by virtue of being quarantined within a trust structure. 

[API editor's note: Trust structures, including hybrid trusts, have been covered regularly in API magazine.] 

Get a pre-nup

Many lawyers recommend that asset-rich investors get a pre-nup. In an ideal world, pre-nups wouldn't be needed, but in the real world it’s highly advised. The Justice Department’s 2012/2013 annual report declared that there was a 28% increase in new divorce matters.

The choice is yours. If you believe your relationship will last and/or that your partner won't take you to the cleaners - don't get a pre-nup. But if you want to ensure the on-going ownership of your properties, push for a pre-nup. 

Ensure you have an up-to-date will

Again not another great discussion point, but no one should 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. 

Buy cheap

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 also 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're able to buy at a discount to market you have, in effect, created immediate equity which has its own risk management value. 

 

Image courtesy of: cfainc.us