Bonking as a metaphor for life.
Ok the Australians in the room are worried my blogging has descended to some new low where I use sex to get click throughs.
In reality, the metaphor is one from cycling, where bonking is a moment where you literally hit the wall. Run out of energy. Your legs feel like lead and the group of lycra-clad cyclists in front of you disappears over the hill leaving you alone and far from home.
How does a fit cyclist find themselves in this world of hurt? The answer lies in the days before. The nights without enough sleep. The skipped and poorly prepared meals. Inadequate hydration. This lack of preparation prior to a big ride can mean disastrous results.
The real world is no different. Today I find property investors, who in an environment of decreasing rental yields feel trapped into a decision that acts like a financial “bonk”. They can’t service the mortgage debt comfortably and have lost the will to go on, yet find like the cyclist they are stuck, alone and a long way from home. They feel inclined to sell and realise a loss. They want to get on with their lives. The excitement and heady days of investment property ownership long gone.
So what went wrong?
Investment in property is incentivised by our tax system in Australia as the government drags private capital into the market to minimize its spend on social housing. The effect of this is that buyers automatically start in negative territory claiming their costs as a tax deduction and smugly patting themselves on the back as they pay interest on the biggest amount they can possibly borrow. This is the start of the slippery slope. There isn’t enough preparation allowed for the future. When an economic hill comes along and our investor/cyclists have to dig deep and put the power down they are found lacking.
Economic hills present in many forms. Decreasing rental yields. Real wages reducing. Unemployment. Interest rate increases. Unforeseen general maintenance costs. The cost of repairing the property after a particular uncaring tenant has vacated. And yet for a little preparation, all of these are hills to be conquered.
Investment preparation is all about ignoring the hype. The best time to invest is when you are ready. That starts with a savings plan. Make sure there is real equity in the property. Ensure you have a repayment buffer. Get ahead in your repayments. Pay principal and interest. Consider positively geared property, or as close to neutrally geared as possible. Ensure you have Landlord insurance. Take a long term position!
This considered (boring) approach has made a lot of people very financially secure in their later years.
Regularly over the last two years, I have sat with an investment property owner and talked through a financial “bonk”, where they feel like the wheels have fallen off their investment bicycle. As long as they have cash flow my position is to keep the asset (this does not constitute personal advice – please consider your own situation carefully!). My belief is that the holding costs, over the time it will take for the property to start performing again, are unlikely to be as high as the price reduction and exit costs associated with selling.
Your goal is to stick with the property peloton for the whole race, not quit when you hit the first hill!