The single metric that tells you the state of the property market

The average investor’s ability to get finance tells more about the property market than most people expect as it reflects the macro- and microeconomic factors that drive growth into property markets across the country, according to him.

Mr Kumar explained: “I think, by and large, the ability to get finance, how hard or easy it is to get finance, dictates pretty much everything.”

“If accessing finance is a lot harder, you find that less properties are going to auction, less properties are being sold and properties stick on the market for a lot longer. Yet, if it is easier, you find that most properties push towards auctions, properties stay on the market for very few days,” he highlighted.

In particular, the bank’s willingness to lend can give you a prudential insight on interest rates, global financial markets, economic fundings, lenders’ competition and other factors that may affect your portfolio.

“If you see interest rates coming down and specials coming up around particular rates or percentages and you think, ‘Hang on a second – banks have got money to lend’, that’s an indicator that you like to see,” the property specialist said.

Essentially, an investor’s ability to get finance dictates how they acquire properties and build a portfolio. As a result, that ability also influences the movements of the market.

‘Game of finance’

Considering the huge influence of finance on property investment, investors often incorporate a strategic financial plan into their wealth-creation strategy.

For instance, some investors are purchasing properties with a build potential in affordable corridors in order to benefit from increasing equity without overcapitalising, while others are keeping their properties positive- or neutrally-geared to maintain good serviceability and be able to continue growing their portfolio.

The market at its current state, where prices are going up and lending regulations are tightening, proves to be a tough playing field for investors.

After an unprecedented property boom, particularly in Sydney and Melbourne, a majority of the markets across the country have started to soften. Suddenly, investors are having a hard time accessing finance for the wealth-creation venture.

According to Mr Kumar: “For example, if one of your strategies is to live off the equity that you grow through property and you can’t get finance now, you’re probably eating baked beans and dollar loaves of toast.”

The property specialist said that investors must pay attention to how they sort out their finances in order to keep a foot on the property ladder. As easy as it is to take the first step, it could be quite a challenge to stay on the journey considering unpredictable fluctuations.

“Property investment is all about finance. If you can't get the finance, you can't control the wealth. If you can’t control the wealth, you don’t have a lifestyle,” he added.

‘Control the cash flow’

At the end of the day, Mr Kumar advised investors to ‘keep it simple’.

There will be a wide variety of investment strategies available in the market which can help you control your finances – some straightforward and others a little complex.

The unspoken rule of seasoned investors, according to the property specialist: If you struggle to understand the concept, it might not be the right thing to do.

Mr Kumar said: “It should not be complicated. Buy well, hold onto it, make sure you get your rent so it pays off the loan, and just for wait for it to work on your side. Hold it for a couple of property cycles.”

Having said that, investors must be open to the possibility of changing strategies over time.

After all, the property investment landscape is rarely a straight line. Thus, your strategies must fit the current state of the market as well as your goals, capabilities and limitations as an investor at a given time.

The property specialist explained: “If finance gets hard, you need to start to looking more cash flow or stop buying for a little while. If you’re just starting to build out your portfolio, you got to start from good fundamental areas and make sure you’re aware of the amount of negative cash flow you’re going to carry since you’re in the acquisition phase.

“You shouldn’t have loans hanging around for a lifetime. You need to actively look at ways of paying it off so you can control the cash flow. If you control the cash flow, all of this dilemma of which strategy to implement fades away because you’re actually controlling the income – that’s what investing’s all about.

“You’re controlling the income and letting the wealth-creation or equity build-up happen in the background. In other words, look after your cash flow and the equity should happen,” he concluded.

Tune in to Investing Insight’s June episode to find out how different property investment strategies will work in today’s market.