How To Generate Wealth Through Property

Read below for the four key pillars on how to generate wealth through property,

1.  Develop The Investor Mindset

Before embarking on your property wealth journey, it is crucial to develop an investor mindset. The investor mindset refers to having a long-term vision and the willingness to take on calculated risks to generate wealth despite property cycle fluctuations.

Actively working on your vision and beliefs when it comes to investing, will ultimately dictate the success of your investing behaviours. For example, if you think the market is working against you and are waiting for the ‘right time’ – chances are you will likely never take the opportunity to invest.

Here are four actions you can take to develop an investor mindset:

1. Determine Your WHY

Your why refers to the sole purpose of why you want to embark on a property wealth creation journey. It could be a comfortable retirement, a secure future, setting up your children, paying down your mortgage sooner or simply living more comfortably! Whichever it is, this reason will keep you motivated and accountable throughout the investment journey.

2. Spend Wisely

When it comes to property investment, there are two key items to be mindful of: money in vs money out. Without a sufficient deposit, demonstrated savings and relative spending habits, limitations will be placed on your overall borrowing capacity, narrowing your scope of where you can afford to buy.

3. Do Your Research

In order to build a successful property portfolio, sufficient education and research is paramount. By working with accredited specialists like AllianceCorp, we will review your current financial situation, overarching goals and borrowing capacity, and create a property strategy tailored to your lifestyle – ensuring the property will generate generous returns without impacting your lifestyle.

4. Trust The Process

Property wealth creation is a long-term commitment. It is not a ‘get rich quick’ exercise. Before you invest, it is important to recognise and accept that property growth is experienced over the long term due to the nature of property cycles.

2. Understanding Finance

Borrowing power is a term that describes the amount of money you are able to borrow, based on your financial situation. Contrary to popular belief, borrowing is not only for those with a high income. When it comes to applying for a loan, the bank takes into consideration several considerations including but not limited to savings, deposit, expenditure, income, existing debts, credit scores and more.

What will the bank consider:

1. Income & Expenditure

Lenders will consider your income when determining your borrowing power, as this will give an indication of how much you can afford in repayments. In addition to this, your employment history will also determine your ability to pay off a home loan. Generally speaking, lenders tend to look favourably on a consistent employment record. If you have been in your current job for several years, lenders may well view this positively, as it signals to them that you are settled and stable, and therefore less of a lending risk.

However, it’s not all about the amount that is coming in. In many cases, lenders will closely examine your bank statements to get an idea of your spending habits, and some may even ask you to provide your credit card statements or an itemised list of your monthly expenses. Lenders may consider how much you spend on living expenses each month, as well as hobbies and entertainment. The reason for this is to help lenders form an opinion of whether you live within or beyond your financial means, which in turn can affect the size of any home loan they may be willing to approve you for.

2. Debt & Credit Scores

A credit score is a number that determines how trustworthy you are as a borrower, and is typically measured on a scale of 0 to 1,000 – the higher your score, the more desirable a candidate you are to lenders.

In general terms, actions such as paying your bills on time and making regular progress payments on your debts will help improve your credit score, while bankruptcies, defaults, unpaid debts and unsuccessful loan applications will lower it.

Assets such as cars, superannuation and any properties you may own already as well as liabilities like credit card debts, HECS or HELP debts, personal loans, car loans, home loans or credit cards you may have may hinder your borrowing capacity as lenders will factor this in as a future debt.

3. Deposit & Savings

Lenders will look favourably on your application if you have a demonstrated history of contributions to your savings as it signals to lenders that you are able to manage your money, and is likely to count towards your deposit when you eventually purchase a home. Demonstrating that your deposit is made up of genuine savings that you’ve grown over time can also give lenders more confidence that you’ll be able to afford your mortgage repayments.

The loan-to-value ratio (LVR) of a home loan is the loan size as a percentage of the property’s value – put simply, the value minus your deposit.

Lenders may have different LVR ranges for various home loans, which will determine how much you can borrow and how much of a deposit you will need to have saved.

For example, if a lender requires a maximum LVR of 70% for a loan ‒ this would mean you need to have at least a 30% deposit saved. A bigger deposit means a smaller LVR, so the more money you can contribute towards the purchase price of a house from your savings, the lower the LVR and the smaller your loan size. In turn, you won’t need to borrow as much and will be less of a risk to the lender.

Having a deposit of at least 20% (a maximum LVR of 80%) also generally means you can avoid paying lenders’ mortgage insurance.

3. Creating A Property Wealth Plan

When it comes to creating a property wealth plan, you must consider both your finance and property strategy. Depending on your financial circumstances in relation to debts, expenditure, income and cash flows, this will ultimately determine the best property strategy for you moving forward as no individuals are the same. To help get started, there are a few factors to be considered:

1. Debt Management

Before you can get started in property investment, it is crucial to review your current and foreseeable debts. If you have considerable debts, in order to increase your borrowing capacity you would need to look at paying those debts down to a more manageable level. Lenders will evaluate this closely to ensure you can meet monthly repayments, this is deemed as being your serviceability.

2. Cash Flows

To ensure that your portfolio manages the costs of the investments independently, money coming into your account should be more than what is going out, demonstrating a positive cash flow. Showing this on a month-by-month basis, creates contingency in the event unforeseen costs/circumstances arise.

3. Borrowing Capacity

Your borrowing capacity is the determining factor of what you are able to borrow and therefore determines what you can afford to buy and where. Acquiring properties that are positively geared, will have a better effect on your borrowing capacity. If a property is negatively geared, this will greatly hinder your borrowing capacity as it shows the bank that you are having to use your personal income to fund the investment which affects your net disposable income, negatively impacting your serviceability on future loans.

4. Master Facility

Leveraging a master facility, will essentially act as your ‘business account’, creating a firewall that separates your personal finances from your investments. Through this method, it continues to mitigate risk in the event there are some challenges/losses in your property portfolio and will not impact your personal finances (i.e. day to day expenses, bills, family expenses etc.). This has a number of purposes, mainly to manage the running of the investments and create contingencies for building capital within the facility through cash flows.

5. Diversifying Your Portfolio

Rather than putting all your eggs in one basket and generating a high-risk approach, it is best to have a balanced and diversified approach by acquiring properties in different locations to mitigate risk and capitalise on property cycles.

4. Working With The Right Property Professional

If you choose to create an investment portfolio, engaging the right professional with accessibility and knowledge of the area in question is imperative to your portfolio success.

There are five main types of property professionals that should be considered:

1. Real Estate Agent: Real estate agents sell established properties and represent the seller. Real estate agents operate under stringent regulations to protect consumers.

2. Buyers Advocate: Contrary to Real Estate Agents, Buyer’s Advocates act in the interests of the buyer/investor. They do this by sourcing the most suitable properties for the buyer’s needs and conducting due diligence on their behalf.

3. Project Marketers: Project marketers sell off the plan or new properties. Project marketers do not operate under stringent regulations designed to protect consumers. Property Investment Consultancy: This group comes in many forms and includes individuals and companies who promote education, mentoring, various property strategies and assistance with purchasing mainly new or off-the-plan properties, but can assist with established property selections as well.

4. Property Spruiker: A spruiker is someone who tries to persuade people to buy something, use a service, etc often in a dishonest or exaggerated way. In the property industry, spruikers will often target investors, posing as property investment consultants, mentors, financial planners etc. The key difference is that a spruiker is more interested in their revenue, rather than delivering a quality service to their clients.

If you’re interested in learning more about how you can generate wealth through property, simply fill in your details below to get in contact with a member of the team, or head to this link to learn more about our Property Wealth Planners.


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