There might be many valid reasons why you might want to reduce your gearing ratio; whether it is a change in your family situation, retirement, or the economy. We cannot predict how much that will be, but let’s assume that over time the value of your properties double (whether it takes 7, 10, or 12 years). By this fact alone, you have reduced your gearing ratio already. You can then sell one of those four properties and use the cash to pay back the mortgage. By doing this, you significantly reduce your gearing ratio further and at the same time increase your positive cash flow.

Money Management Matters

It is essential for any investor not only to manage the property portfolio, but also the money. What good would it do if we have a bunch of properties, but can’t pay our electricity bill anymore? That’s where money management comes in. The main goal is to ensure that we always stay liquid and can meet all payment obligations at all times.

Five golden rules of money management are:

  • Always stay in a liquid position
  • Monitor your cash flow and expenses
  • Build up some reserves
  • Expect the unexpected
  • Do a stress test on your portfolio

Staying in a liquid position refers to your ability to have sufficient cash available to pay your mortgage payments and all expenses including your daily life needs such as insurance, utilities, and credit card bills. Why is this so critical? If you fail to meet your payment obligation, it might have dire consequences for you. Those could include re-possession of your property by the bank, or in the worst case, you could even be declared bankrupt.

You can stay in a liquid position by continuously monitoring your cash flow and expenses. Write down on a sheet of paper or in a spreadsheet (you may contact me if you would like to have a free template for that) what type of expenses you have and when they will occur as some of them are less regular than others, such as annual insurance payments. Against that, put all the income you have from your job, business, and of course rent from your property portfolio.

You should put those numbers against a timeline to see how much comes in and goes out every month and every month it has to be a positive number. Then monitor whether these numbers that you have planned for actually happen as planned or whether there might be any deviations like unplanned expenses or a tenant not paying the rent.

Can you plan everything ahead? Surely not. You need to cater to unexpected events such as repairs, rising interest rates on your variable mortgages or tenants not paying on time. After all this, you still need to be in a liquid position. Therefore, you need to build up sufficient cash reserves. So don’t invest all your money into properties or other less liquid investments. Keeping some cash reserves in the bank is absolutely necessary.

Also, do a stress test on your portfolio. This is like a ‘What If’ analysis. What happens if the interest rates rise to a certain level or what happens if the market value of some of my properties goes down or what happens if I have voids or tenants don’t pay the rent? This simulation exercise helps you to proactively anticipate and manage those scenarios before they even occur and ensure that you are still financially sound and liquid at all times, even if things might not go as per your plan.


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