Most Australian property investors own only one property.
While one is better than none, those who wish to really grow their wealth need to build a portfolio of properties.
Unfortunately, the stumbling block for many is they are not aware of how to improve their borrowing capacity to allow them to progress from one investment to multiple properties.
In a recent webinar, Andrew Courtney of Plenitude Wealth and Hotspotting founder Terry Ryder, discussed the ways to make the best use of your borrowing capacity, to create a successful property portfolio.
- Don’t go too big too early
- Buy high yield properties
- Buy in a trust
- Aim for positively geared
- Use different lenders
DON’T GO TOO BIG TOO EARLY
“Without a doubt the biggest pitfall that a lot of Aussies tend to fall for when it comes to protecting their borrowing capacity is the fact that they go too big too early,” Courtney says.
They then find it difficult to buy a second or third property because they’re maxed out their borrowing capacity and can’t pay down their mortgage quickly.
Courtney says improved borrowing capacity allows investors to then purchase another property for their portfolio and in an ideal world, your property portfolio becomes a machine that pays for itself and funds future investments.
BUY HIGH YIELDING PROPERTIES
Where many investors go wrong, is that they buy properties with low yields, hoping for capital growth.
“But they get caught out on the deficit side of the equation, which actually affects their borrowing capacity even further with increasing interest rates,” Courtney says.
“So, you may want to acquire higher yielding investment properties, especially at the start of your investment process, because your borrowing capacity is what determines how you can amplify the returns and how much faster you can go again.
“In terms of what you want to buy, a good rule of thumb is to buy at or below median price. It’s really as simple as that, because you’ve got the opportunity to add value ASAP with a small cosmetic renovation.
Hotspotting founder Terry Ryder says the good news for investors is there are plenty of affordable locations where there are above average yields. The latest Hotspotting Top Ten Positive Cash Flow Hotspots report, identifies some of these.
BUY IN A TRUST
Buying under the right entity can improve borrowing capacity over the medium and long term.
“Where most people go wrong is they acquire under their names only. You want to be acquiring under a trust, especially with a high-yielding property that starts to pay for itself, because then you can start to maintain the loan to value ratios at 80%, 70% or 60%, depending on what kind of risk you’re willing to take.
“By buying under a trust, what happens is, as soon as that property becomes positively geared and it starts to pay for itself, the banks will sever the relationship between you and the trust, thereby allowing you to increase your borrowing capacity once more.”
The disadvantage of buying in a trust is that investors don’t get a tax deduction under their name as they can’t distribute the losses to the beneficiaries.
“So, it has to stay within the trust for future earnings. And that’s the challenge for a lot of short-term investors.”
AIM FOR POSITIVELY GEARED
Positively geared properties, where the rent is higher than the expenses, will determine how much borrowing capacity you get back.
“If you can maintain a positive cash flow property or get it to positive cash flow ASAP, what happens is you can get your borrowing capacity back, thereby allowing you to acquire another and another, another,” Courtney says.
“Your loan to value ratio can determine a lot of the returns that you end up getting because that frees up some cash, some equity, so that you can go again.”
USE DIFFERENT LENDERS
To increase your chances of being able to borrow for more properties, Courtney says it’s a good idea to shop around for different lenders.
He says most banks will try and cross collateralise everything, so if you stick with the same bank every single property in your portfolio is bundled into one.
“So, the outperformers, you won’t be able to pull lazy equity out and go again because the banks will be looking at the full portfolio rather than the outperformers only. By keeping it separate, it allows you to have that flexibility and the manoeuvrability to be proactive in your approach, thereby speeding up for the velocity of lending.
“The reality today is that loyalty to your bank is not rewarded by the bank, it’s quite the opposite, in fact, investors or anyone with a mortgage needs to be constantly shopping around.’’