Finance advice
Determining a property portfolio’s growth

Determining a property portfolio’s growth: Metrics to use

By Bianca Dabu

Smart Property Investment’s Phil Tarrant makes it a point to keep himself and his financial team updated about the different factors that contribute to the growth of his property portfolio. He shares some important metrics that help him and his team track the progress of his wealth-creation journey.

Debt position

The total debt position of Phil’s portfolio is $4.9 million, which was mostly accumulated after his most recent purchases, including a block of land with five “connected properties”. Just last year, the property investor has secured six properties.

“That's increased our debt position but also our asset value position,” he said.

Total equity and cash flow

Considering his debt position, Phil’s portfolio’s total equity is now at $2.28 million.

The property investor explained: “That's ... how much is this portfolio worth less the debt … That's not cash. That’s equity … For us to get that out, we needed to do a lot of stuff.”

Another metric he uses is “total equity at 80 per cent”, which is the money available for refinancing which he can use to acquire more assets.

“We have $845,000 sitting there,” Phil said.

The total purchase price of all the properties in his portfolio is $4.314 million. Over the years, the total asset value of his portfolio has grown to $7.2 million.

According to Right Property Group’s Steve Waters: “The interesting number there for me is the purchase price versus the current debt. There is $4.3 [million] versus $4.9 [million] on debt."

“Obviously, we've leveraged along the way to be able to leapfrog into other properties … The important thing is [that] the debt has increased and it had to … [because we were at the accumulation phase],” the buyer’s agent explained further.

At a particular point in his journey, Phil would have to decide whether to stop purchasing properties and pay down his debt, which explains why cash flow is critical when choosing investment properties to buy. The property investor currently gets $314,000 worth of rent per year—enough to cover the operating costs of his properties without having to add to his debt.

Operating costs

Operating costs such as accounting fees, land tax, property management fees, repairs and maintenance, and insurance are among the factors that can contribute to the overall growth of a property portfolio. Phil’s portfolio costs $64,000 every year to hold.

“[For every] $314,000 dollars … it's a negative of $64,000 dollars,” he said.

However big the number seems, if you consider the size of the property portfolio, the holding costs only equates to around $72 per property per week.

Phil said: “As long as we are going up more than $64,000 a year, we are in a positive position,”

“We've got the ability to pay the debt,” Steve added.

Loan-to-value ratio and interest rates

The portfolio’s loan-to-value ratio—the debt you hold against the value of the portfolio—is at 68 per cent, while the gross rent to yield—the rent over the purchase price—is at 7.2 per cent.

The highest interest rate across the portfolio, which consists of seven houses, seven units, and four townhouse villas in New South Wales, Queensland, and Victoria, is 5.74 per cent while the lowest interest rate is 4.79 per cent.

‘Weighted average cost of capital’

Instead of using the average interest rate to look at the asset value over the cost of debt, accountant Michael Johnson suggests using the weighted average cost of capital, which is “the total interest expense that you pay every year [divided] by how much debt you have”.

According to him: “It puts weight behind so you've got a bigger loan and it's at a higher rate. When you have a small loan, it's a lower rate. Obviously, that has different amounts [of] the absolute value that you actually pay up.”

“By using this weighted average cost of capital, we can sort of see what the true interest rate across the entire portfolio is,” he explained further.

Reducing rates

In terms of interest rates, the cost of debt in Phil’s portfolio has gone up by around $15,000 over the last four to six months. The property investor and his team are currently looking to review the mortgages in order to formulate effective strategies that will reduce these rates.

Steve said: “[Because Phil is] self-employed and [the portfolio has] various [sophisticated] structures ... sometimes, the banks want to charge a little bit more to cover [the possibility of] risk. But, at the end of [the] day, if [they] could drop rates by half a percent as an average across the total debt, that's a lot of money.”

According to Phil, they may start looking for more debt, which will serve to prove his good serviceability to the lender.

The property investor shared: “We should be able to drop that … $64,000 deficit by looking at interest rates [as] one of the levers you can use to improve your cash flow."

“Remember: We are talking about pre-tax policy. Post-tax, we do pretty well,” he added.

“It's important to talk about your pre-tax dollar just simply because that's cash. That's what's in your bank at the moment, and we think that's the best metric to use,” Michael concluded. 

Tune in to Phil Tarrant’s portfolio update on The Smart Property Investment Show to find out more about the recent news headlines and what is happening in the property investment world. 

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  ["title"]=>
  string(51) "Boost for investors as app sets up off-site bidding"
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  string(55) "boost-for-investors-as-new-app-sets-up-off-site-bidding"
  ["introtext"]=>
  string(144) "

Property investors are now able to identify and bid on auctions remotely using a new live-streaming functionality launched by Gavl.

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Called “Request an Auction”, the new functionality enables users to watch and bid on any Sydney or Melbourne auction remotely.

Through Gavl, prospective buyers are now able to register to bid on their preferred auction. The platform will obtain permission from the listing agent and confirm within 48 hours.

Vendors can also request to have their auctions broadcast to a larger buyer audience.

Co-founder Joel Smith said that auctions streamed on Gavl attract 47 per cent more viewers than traditional ones.

He said that Request an Auction will be valuable for remote buyers.

“Buyers are able to have Gavl attend any auction they nominate, so they will never have to miss out on an opportunity due to logistical complications in physically attending the auction.

“Vendors, too, have the opportunity to directly book an auction with us, so they can open up their event to buyers all around the world. With more potential buyers, they’re giving their property the chance to receive more bids and maximise their sales result.”

Mr Smith said that prior to the Request an Auction app, buyers were limited to what they could achieve through the Gavl technology.

Gavl is a live-streaming and bidding platform for real estate auctions.

Mr Smith said that it has streamed more than 6,000 auctions, which have achieved 3.5 million views from 50 countries.

Gavl’s Request an Auction function is currently being offered in Melbourne and Sydney only.

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Boost for investors as app sets up off-site bidding
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Having to split her time between Hong Kong and her original base of Sydney has not slowed Julia Tita’s goal of building a high-performance Australian property portfolio. Instead the resulting alterations to her strategy have positively impacted her investing success.

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Having recently purchased her 6th property, Julia joins host Tim Neary to discuss her journey, share her ups and downs over the years, and reveal her thoughts on why some properties are better than others.

Julia also explains why she no longer makes a move without the help of a buyer’s agent, why working with a strong team of specialists is extremely important and discloses her long-term property ambitions.

If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: FacebookTwitter and LinkedIn.

If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!

RELATED AREAS OF INTEREST:

Why is Australian property so unaffordable?
Brisbane infrastructure attracts international interest
Going global
Australia desirable to foreign investors

AREAS MENTIONED:

Eagleby
Charters Towers
Townsville
Brisbane
Paddington
Sydney
Orange
Melbourne 
Glen Iris
Bondi

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How a move to Hong Kong impacted Julia’s Australian property goals
object(stdClass)#1215 (52) {
  ["id"]=>
  string(5) "18159"
  ["title"]=>
  string(88) "‘Common’ referrer practice of being paid on both sides of the fence coming to an end"
  ["alias"]=>
  string(82) "common-referrer-practice-of-being-paid-on-both-sides-of-the-fence-coming-to-an-end"
  ["introtext"]=>
  string(246) "

The practice of property investment firms sharing undisclosed kickbacks among the supply chain involved in development sales will be outlawed in NSW on 1 July this year under the Real Estate Reform being handed down by regulators in NSW.

" ["fulltext"]=> string(2238) "

Property commentator and valuer, Suburbanite’s Anna Porter, said the reform will address conflicts of interest.

She said they arise when a mortgage broker, accountant or financial planner receives part of the commission from the property firm, who receive their fees from the developer or seller.

“This puts the broker into a position by which they are being paid on both sides of the fence,” she said.

“Until now this has been a grey area and there was nothing stopping this practice.” 

Ms Porter said this has been a common practice in the industry.

"Some well-known mortgage broking firms openly admit to receiving $5,000–$10,000 per referral in their pocket.”

She also said this process has been going on for decades.

"Property investment firms commonly pass some of their commission on to the mortgage broker, accountant or financial planner as a reward to them for passing on the referral. This means that many brokers or financial service providers are making significant amounts of money just to refer on to a property firm, often totalling hundreds of thousands of dollars a year," Anna Porter said.

Ms Porter said the Property, Stock and Business Agents Amendment (Property Industry Reform) Bill 2017 will be in force from July this year, and will prohibit this practice unless the broker or referring partner also holds a real estate industry license.

"Under the new laws, if the broker takes a referral fee from the property firm, they will have to be a licensed real estate agent and also hold a corporation’s license,” she said. 

“Subsequently, every transaction that they receive a referral fee from, they will be putting their license up against the transaction and taking full liability for the conduct, practices and outcome of that transaction, even if they have little to do with the transaction; they are a party to it financially and therefore take as much risk as everyone else in the transaction.”

Mr Porter said where a referrer holds a real estate license, and receives a part of the sale commission, they may find themselves in breach of the ethical requirements under the act.

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‘Common’ referrer practice of being paid on both sides of the fence coming to an end

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