Hey guys,

This is by far the hardest part in property - sitting on a galloping market but this is what you must do. Stop buying and start creating an equity buffer. This simply means that you will need to begin to gather food for the winter. As we approach the winter cycle your property will begin to slow in its levels of growth as interest rates increase. Your positive cashflow will become tighter and you will need to use the equity buffer to fund this.

You achieve this in two ways the first is by selling some property and placing the proceeds straight into your mortgages to correct any cashflow deficiencies. The second is a little more risky and that is to simply remortgage your properties to maximum using a line of credit, offset or similar facility. Then use this cashflow to fund any shortfalls through the winter. You must always remember though in property you simply don't know how long each season will last.

So we’ve jumped ahead a little because the key to this part of the cycle is picking the right time to jump in. Too early and you are not maximising your returns, too late and you could be in for a serious reality check. Picking the right time is perhaps the hardest aspect of building a property portfolio.

I once had a gentleman call me for advice who had started with four properties that he bought through the winter. No complaints yet. The spring came and be began a purchasing frenzy. Still no complaints.

Throughout summer he maintained the same frantic pace of remortgaging for equity, buying and selling to buy more. By the end of summer he had 30 properties in his portfolio. Fantastic you say - well I wasn't quite so comfortable and if anything l had a scary anticipation of his next sentence. Sure enough he had kept buying right through autumn and ended up with 50 properties. Talk about throwing caution to the wind.

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So as you might expect as interest rates rose so did his monthly repayments, he tried putting his property on the market but the were all mortgaged to the hilt and as they had grown so much so quickly even if he did sell the capital gains liability would have taken any chance of a profit.

So a year on and he is down to 12 properties and well and truly ruined his credit rating so purchasing property is not an option in the foreseeable future.

Now as l spoke to him l asked what he thought would have happen if at 30 he had have stopped buying and started restructuring his portfolio. As we played with numbers it became evidently clear that had he stopped and done nothing but remortgage. The equity he would have had would have seen him through the winter.

Just in case you are wondering what l told him he could do to save his situation. Quite simply decide what you can afford make sure you never fall behind in the mortgage on those ones. Preferably they would all be with the same lender that you dont have any of the other fire sale properties with, this way you can build a good relationship with one lender who, after a period, may consider the special circumstances.

In truth if he went into bankruptcy the properties would be lost anyway. Mind you at the time l am writing this he is still battling and hopefully will pull through.

So what’s the lesson for you. Cashflow kills… It might seem funny but the lack of cashflow will cause you house to be repossessed but a lack of capital or negative equity will simply stop you from buying more.

Live with passion,

Brett Wood