Where do I start
Without doubt the most important place to start when starting your portfolio is to seek professional advice.
In this section you will discover important factors that you may not have considered which are crucial to building a successful portfolio.
Understanding borrowing capacity, leveraging capabilities, cash flow management plans, property selection, yields, growth factors are just some many variables that need your full attention.
You need a Property Wealth Plan.
Your property wealth plan will be your compass on your journey to achieving your financial goals.
Property investment is no different to playing chess in that a well thought out strategy is key to your success. Except what’s at stake is very different.
During a complimentary coaching session a Property Wealth Planner will cover the following principles and criteria which is crucial to building a successful portfolio.
This can be one of you most important principles to master.
- Your ability to succeed by getting professional advice
- Your ability to more properties sooner and fast track your results
- Your finance to enable you to build wealth
The below diagram clearly demonstrates the effects of leverage:
Why we invest in property?
Investment $100k $100k $100k Investor 1 2 3 Leverage 50% 80% 95% Total Investment $200,000 $500,000 $2,000,000 10% Growth – 1yr $220,000 $550,000 $2,200,000 Gross gain $20,000 $50,000 $200,000 Return on investment 20% 50% 100%
By simply focusing on a 5% deposit when buying property rather than 20% you have doubled your investment.
Understanding the finance will give you the confidence to succeed. Any concerns regarding cash flows, impacts to lifestyle etc. can be elevated when you use a Master facility.
Benefits to implementing a Master Facility:
- Equity can be used to cover deposits, stamp duty and other associated costs
- Releasing your equity first means you don’t have to secure the investment properties against the home therefore avoiding cross collateralisation
- The Master Facility also acts as a buffer to cover any holding cost and unexpected costs – therefore no impact on lifestyle
Understanding your Borrowing capacity
One of the first things you should be doing before considering a purchase is to research your borrowing capacity. This goes a lot deeper than simply asking the bank whether they will give you the loan.
Most Australians don’t own more than 2 investment properties which will not achieve their financial goals. To be successful you require a portfolio properties.
So why is it that most investors stop at two?
Answer: For most of them they have no choice as their borrowing capacity will not allow it.
When speaking to your broker or mortgage broker the most important question you should ask is not whether the bank will lend you money to buy an investment property but:
- If I buy this type of property (example – negatively geared) will it prevent from getting a loan to buy the next one?
If the answer is yes – don’t buy it.
See the below case study for more information
We’ve all heard the old saying – don’t put all your eggs in one basket. Well this is so true for property investing. Diversifying enables you to spread the risk and increase the chance of benefiting from great returns.
There are many elements necessary to balance a property portfolio explained in the diagram below:
Case StudyCombined income: $110,000
Rental income on three investment properties: $50,000
Monthly repayments on current mortgage and investment properties: $6,500
Peters approach the bank for a $400,000 loan to purchase another negatively geared investment property.
As you can see above when entering the rental yield of 4% which is approximately $16,000 to the $60,000 they were already receiving from the other three investment properties the bank is still only prepared to lend $247,000.
Peters approach the same bank for a $400,000 loan but this time they present figures on a positively geared property.
The positively geared property is generating rental yield of 9% which is equivalent to approximately $36,000 pa. With the increased income the bank will lend $413,000 which is enough to continue building their property portfolio.
People who are looking to build wealth can’t forget that in order to build wealth you need to invest which usually involves borrowing funds. If you invest in strategies that are low yielding you will eventually have a serviceability problem and therefore can no longer borrow to invest. It is important to invest in growth assets but not at the expense of not being able to grow your portfolio.
With so many strategies to choose from it can quickly become overwhelming which leads to procrastination.
Our Property Wealth Planners will de-mystify the strategies that are best suited to your circumstances and ensure you build a balanced portfolio.
While some companies only promote their own strategy we are strong believers that a diversified portfolio that includes many different strategies is by far the best approach.
All strategies have their benefits and can be used collectively to leverage your results.
Value Add in Metro locations Strong Negative to neutral Medium Great for building equity into property from day one OTP Apartments in Metro location Medium to strong Negative to neutral High High depreciation, yields, low stamp duty but avoid over supplied areas Cash Flow Positive House and land packages Low to medium High High Great where CFP income and low establishment costs are required. Location very important. Development projects Medium to high Medium to high High Can generate significant returns but comes at high risk. More suitable for experienced investors Syndicates
How you exit property investment is just as important as how you enter. It’s how you end the game that will ultimately determine your success.
There are many strategies to consider and while your exit strategy might be many, many years from now it is important to understand your options.
We always advise that the best way to approach this issue is to include not only your Property Wealth Planner but also your accountant and financial planner.
Options could include:
- Balancing the debts
- Sell all properties
- Leave some to the kids
- Transfer property into self managed super fund
- Property Investment
- Buyers Advocates
- Property Management