What’s your tolerance for interest rate rises?
Low-interest rates may present an opportune moment to add further properties to your portfolio, but a mortgage expert wa...
Property investor Eric Wu planned to double his asset base in 10 years but, along the way, he decided to alter the speed of his accumulation in order to manage the risks associated to his chosen strategy.
While he still has the same goal, Eric is in no hurry to purchase more assets now—focusing his time and energy on consolidation and debt reduction instead.
According to him: “With the current environment, I think [I need] to be a little bit careful [about the speed of accumulating and] be wiser about what asset to choose.”
He describes the current condition of major property markets in Australia as “[past] the peak”.
The property investor explained: “My view from my experience and from experience of my clients … Sydney and Melbourne [have already] reached the peak … Some area has come down a little bit, but it's not [very] alarming.”
“It's just a correction—[going] stagnant after the crazy booming for the past five years,” he added.
Despite this, some property markets in Sydney still present good investment opportunities, including the Badgerys Creek area where major developments are underway.
As a seasoned property investor, Eric decided to move towards more sophisticated strategies now that he still has yet to make another investment property purchase. Aside from planning to do a small development, he’s also considering dipping his toes on commercial property investment.
He is also exploring markets in the United States, which, according to him, offers around 15 per cent to 20 per cent window yield.
Eric shared: “Some of my friends opened my eyes [to] the U.S. market—it's just amazing. I can't really believe the figures they show me, [which is] roughly 15-20 per cent window yield.”
The capital growth and rental yield also attracted him to the market overseas.
“I have some friends [who] bought in Atlanta a few years ago. At the time, the Australian Dollar permutes 1.1 to 1 U.S. Dollars ... They bought there around $50,000 to $60,000 each [and], I think, [the figures have] roughly … tripled,” he said.
Despite the opportunities in different property markets, Eric recognises that the biggest challenge standing between him and his goal to double his nine-property portfolio is financing—"getting money and balancing money”.
The Australian Prudential Regulation Authority (APRA) has recently set up new structures pertaining to increased serviceability criteria and interest-only benchmarks in order to slow the market down.
While many people believe that these changes are necessary to maintain balance in property markets, property investors are undeniably finding it tougher to create wealth through real estate. This challenge has paved the way for the evolution of the way Eric looks at the whole business of investing in properties.
Instead of simply accumulating as many assets as he could, he now considers lending and cash flow as two of the most important considerations when building and sustaining a healthy property portfolio.
According to him: “Let's give you a simple example: If you accumulate lots of residential properties, the ongoing cost is quite high … so you will not get much cash flow from residentials.”
“You need something [with a] bit stronger cash flow to sustain the existing portfolio [and] make it last longer,” he added.
Aside from consolidation, or examining one’s portfolio in order to maximize profit, he also advises his fellow investors to “activate debt reduction” so they could continue their wealth-creation journey.
He said: “I'm working with lots of first-time investors [who] have a home in major cities, lots of equity. It comes to the point [when] they have kids, [when their] job is very stable, [then] they realise their stipend is not strong enough [or] the pension may or may not exist in 20 years time when they retire, so [they] have to do something.”
“I pretty much help them to set up … [an] extra activity for them to [do] and also set up a structure for them to debt recycle [or] reduce home debt.
“It's mainly about the stability and ... the cash flow … Keep the security and the flexibility,” Eric concluded.
Tune in to Eric Wu’s episode on The Smart Property Investment Show to know more about his perspective as a mortgage broker as well as the common struggles that first-time investors are currently facing.
Property refers to either a tangible or intangible item that an individual or business has legal rights or ownership of, such as houses, cars, stocks or bond certificates.