If you want to grow a substantial property portfolio, you're going to have to borrow from the banks - which means you have to learn to follow their rules.
Blogger: Philippe Brach, CEO, Multifocus Properties & Finance
Does 10 properties in one year sound too good to be true?
Yep, it probably is.
I say ‘probably’ because I am looking at it from a reasonable and willing investor’s point of view – that is, people on a medium to comfortable income wanting to create wealth for later days, and who generally have little time on their hands.
So many people ask me why they cannot invest like the experts, who claim to have become millionaires in a very short period of time.
The reality is that it is all about numbers. These numbers are constrained by lenders. In other words, if you want to borrow, you have to comply with the bank’s rules.
There are three key rules you need to comply with in order to get a loan:
1. THE MORE YOU EARN, THE MORE YOU CAN BORROW
A lender will deduct living expenses and monthly liabilities from your income, and the rest is available to service a new loan. So an investor’s borrowing capacity is finite!
Even if you have a sizeable deposit, the bank will not lend to you if you have reached your serviceability limit.
The most common fallacy is that if an investor keeps buying cash-flow positive properties, the lender will keep lending forever. Most lenders will take into account only 80 per cent of the rental income. It is not very common to find a property that has such a high rent that it will outstrip expenses by so much that it is neutral on someone’s serviceability.
Banks also become nervous if your rental income outstrips your own income, especially if borrowing is at a more than 80 per cent loan-to-value ratio (LVR). Finally, a cash-flow positive property today may not be cash-flow positive if interest rates rise.
2. THE MORE DEPOSIT OR EQUITY YOU HAVE, THE MORE YOU CAN BORROW
The more cashed up you are, the more you can borrow. This also includes equity in an existing property you own. Even if you earn enough, if you don’t have enough deposit, you won’t get a loan.
3. THE PROPERTY YOU ARE BUYING NEEDS TO BE SUITABLE
The bank will obviously want the security you are giving to be safe for them in case they have to repossess the asset and sell it. This is why banks have issues with serviced apartments, student accommodation, small studio units, and so on. They want the property to be as mainstream as possible.
At some point, every investor will experience rejection from a bank because of issues with one of the three rules above. Therefore, it’s important to discover which of these three areas represents your weak point.
When you hear about someone on a very low income, who buys a small property in a location that subsequently booms, and they use equity to get into the next one and the next one, you have to wonder. Unless their serviceability somewhat increased along the way, they will eventually fall short of rule one.
Typically, it’s possible to acquire a large portfolio in a small amount of time if you are:
- Someone who has inherited substantial money and needs little leverage
- Someone on a $150,000 salary, who buys very cheap properties (around $100,000 each, probably in remote areas)
- Someone on a very high salary with plenty of savings
Overall, property investing is a great way to create wealth, but it is more of a marathon than a sprint.