One of the most important factors to consider when growing your portfolio is financing — after all, investments won’t really work without enough funds, whether through cash or loans. What are the factors to consider when structuring finances for your portfolio?
Having a good grasp on finance can help an investor optimise his cash flow and ultimately make money work harder for him, according to Multifocus Properties and Finance’s Philippe Brach.
He said: “Whatever your motivation [is], having a clear plan can mean the difference between an efficient and enjoyable journey and a costly nightmare.”
“Buying one or even two properties is manageable without too much planning, but even then, good management can optimise tax and cash flow in reaching your goal,” the property professional added.
Mr Brach shared his two-step guide for structuring finances for a multi-property portfolio:
As the first step, Mr Brach recommended assessing your financial goals and determining the amount of passive income you want to achieve by the end of your journey.
Then, simply work your way backwards to identify the perfect portfolio size for you, he said.
The property professional explained: “If your retirement target is to have an income stream of $100,000 per annum, you will need $2 million in assets, generating five per cent per annum.”
“You will also need to adjust this to ‘future dollars’, as $100,000 today will be worth a lot less when you retire,” he added.
Aside from helping you set a course for your investment journey, knowing your ideal portfolio size will also help you know the limits of your servicing capabilities.
"There is no point [in] planning a portfolio of 20 properties if your borrowing capacity is only $300,000,” Mr Brach highlighted.
Once you have done the first step, it’s time to collate all the data you need to structure your finance and ultimately build a good portfolio.
However, this data may be overwhelming, which is why Mr Brach strongly advised seeking the guidance of a good and trustworthy finance broker who specialises in structuring loans for investors with multiple properties
According to him, your broker needs to understand how taxation works, the structures allowed by the Australian Taxation Office (ATO), as well as the different ways to optimise a property’s cash flow while reducing your home loan mortgage at the same time.
Those who have good incomes and already have their own home with a partially paid mortgage could be led to believe that they could simply build up their savings to afford the deposit for their first investment property.
However, a good finance broker will tell you that it’s more efficient “to keep the cash savings in an offset account against the home loan, which is not tax-deductible, and release equity from the home to invest in property, which is tax deductible”, Mr Brach said.
He explained: “With this structure, we have created a buffer by reserving their savings, and we have optimised the tax effectiveness of their investment.”
Every investment journey will require a different finance structure based on the investor’s financial profile, so it is important to find a finance broker who will be willing to understand you as an investor — the goals you want to achieve as well as your financial capabilities and limitations.
At the end of the day, their responsibility is to help you keep maximum flexibility and optimise cash flow and tax deductions, while you continue to add assets to your existing portfolio.
“Getting the planning and structure right is the key to a successful and pleasant experience. It’s better to spend a bit more time getting the structure right than rushing straight into an opportunity,” Mr Brach concluded.