Setting yourself up for success
I always get excited when I review our property portfolio. It inspires me to work harder to prepare for our next purchase, as well as giving me time to reflect on some of the decisions we’ve made and the areas we can improve.
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Coming off the back of a marathon meeting with our property team recently – our mortgage broker, accountant and buyer’s agent – I’ve picked up my game over the last few weeks and put some solid planning in place to prepare for our next purchases.
It’s been a year now since we’ve purchased a property. The past 12 months have been pretty intense on the work front as we’ve continued to grow our business, dragging my attentions elsewhere. But our portfolio is always in the back of my mind.
While we haven’t purchased over the past 12 months, the time has been good for our portfolio and this is an excellent case in point on the virtues that time can play in wealth creation, particularly when it comes to property investment.
A property portfolio is constantly in a state of flux. Whether it’s growth in the values of individual properties, changes in rents, losing or gaining tenants, repairs and maintenance
Get the real picture of your portfolio
The equity in our property portfolio has increased favourably and I’m confident in our position to kick-start 2014 with cash on the hip, ready to buy. Refinanced to 90 per cent loan-to-value ratio (LVR), we have the capacity to extract $427,000 from our portfolio. You can do a lot of damage with that!
I spoke last month about the importance of preparation when growing your portfolio: the need for pre-approvals and a game plan for your purchasing strategy.
It’s also essential you have an up-to-the minute view of your portfolio’s performance – you need to be able to quickly ascertain your net position, and this visibility is paramount if you want to succeed in property investing.
A property portfolio is constantly in a state of flux. Whether it’s growth in the values of individual properties, changes in rents, losing or gaining tenants, repairs and maintenance, it always requires some degree of attention.
I outsource the management of all our properties. The time savings I achieve by not dealing one-on-one with tenants is significant, allowing me to direct my attention towards the growth of our portfolio. This is money very well spent, and by and large, the agents we use to manage our properties do a pretty good job.
There are also some very good software programs available on the market to help you manage and map your portfolio. However, if you’re not using a dedicated program, a simple Excel spreadsheet can do the job. It’s important to find out and be comfortable with what works for you when administrating your portfolio; then focus on accuracy, timeliness and simplicity.
You also need to be comfortable in how you report your numbers and the measurements you use to equate the performance of your portfolio. One example of this – and somewhere I see a considerable amount of difference between investors – is rental yields.
This can be an important measurement of the performance of each property, highlighting the return you receive on the investment you’ve made. Yields can be a good mechanism for benchmarking a property against other similar properties in the area, whether you’re assessing the potential of a particular property purchase or seeking to dial up your rent.
There is a range of ways rental yield can be calculated, and they are typically favourable to the agent or developer marketing the property. Obviously, an agent or developer trying to sell a property is going try and paint the best possible picture, and presenting a property based on the rent it receives as a reflection of the actual purchase price is going to give just one measurement.
Smart Property Investment calculates all costs associated with a purchase to give what we feel is a true rental yield. This includes the actual cost to purchase a property (the purchase price) but also all sundry costs, such as stamp duty, bank and associated loan fees, conveyancing costs, buyer’s agent fees, the cost of any renovations, as well as the pest and building expenses.
This gives a more accurate picture of the true cost to secure the investment, with the rental return a reflection of that amount. These numbers, however, are all relevant and as long as you’re consistent, it’s up to you how you choose to assess your portfolio – but my advice is to be honest with yourself.
You’ll find that as you get a few properties under your belt, with a number at different cycles and stages (including those that have been renovated or refinanced), you’ll need a number of other mechanisms to measure the performance of your property. Cash flow, or the impact of tax and depreciation, are just a couple.
I had a good debate with our buyer’s agent, Steve Waters from Right Property Group, while producing this month’s column around this issue of assessing a portfolio. For some of the properties he has held for a number of years and refinanced multiple times, he likes to use a measure of the performance of a particular property as the rent it receives compared to the actual loan amount.
For Mr Waters, this reflects the depth of refinancing activity over time and gives a clearer picture of the property’s performance compared to others in his portfolio, as well as the current market.
Other experts I’ve spoken to in this space, such as Ben Kingsley from Empower Wealth and chairman of the Property Investment Professionals of Australia (PIPA), use a simple measure of yields in their client portfolios to give some general visibility on the viability and success of a property.
However, he uses this in conjunction with in-depth modelling to factor in all other costs associated with an investment, including owner’s corporation fees, property management fees, ongoing maintenance cost provisions, occupancy rates, the benefits of tax and depreciation, cash flow and other elements to offer an insight into the performance of a property over time.
At the end of the day, it’s what works for you. Just be consistent and give yourself a true picture of your real positioning. The best property investment decisions are made by dealing with the facts, not the ‘what ifs’, so get it right early on. If you feel this is outside of your level of expertise, I recommend you seek assistance from the experts and utilise their skills and experience.
Grab the low hanging fruit
We’ve got a number of properties with varying degrees of equity. Those with a higher LVR are typically properties we’ve purchased, renovated and refinanced, using the equity to finance additional purchases.
It’s a strategy that has generated good results and we’ve been able to create a solid portfolio that offers plenty of scope for additional purchases. You’ll also note the properties where we’ve undertaken a renovation to increase rental yield and capital values, but have yet to extract any equity.
There are also properties we’ve purchased well under market value, and sat on, letting time do its work.
Being intimately familiar with your portfolio is critical if you want to succeed in property investing
For us, those properties with significant available equity are the ones we will capitalise on for our next purchases. Our property in Mount Kuring-gai has the most equity available, potentially o-ffering $135,000 should we refinance at 90 per cent LVR. While some of this equity is a result of financing the property at 80 per cent LVR (a 20 per cent deposit), we’ve seen some exceptional growth in this property over the past 12 months.
With a valuation in the mid-$700,000 mark, it’s a relatively straight-forward process to refinance this property to 90 per cent; and the research we’ve undertaken shows this property should continue to see ongoing growth over the period ahead.
It’s quite a tightly held geographic area that is very popular with families, with very few rental properties on the market. This will continue to place upward pressure on rents, giving us confidence the rental return should stay strong and stable.
Our property in North St Marys – the first purchase we made – also offers considerable scope for refinancing, and we’ll look to draw on that equity to finance our next purchases. By refinancing at 90 per cent LVR we can draw approximately $82,000 from this property, giving us plenty of clout to move quickly once the next opportunity arises.
Being intimately familiar with your portfolio is critical if you want to succeed in property investing. Assessing your portfolio on a regular basis will allow you to spot problems as they arise but importantly, give you the confidence to make decisions.
Some of the best opportunities will be those you need to move quickly on. I’ve missed out on a few buying opportunities simply because I haven’t had a pre-approval in place or the cash on hand to pay an immediate deposit – mistakes I plan not to make again.
Our buyer’s agent – who has full visibility of our portfolio and is aware of our “readiness” position – can sometimes require an answer immediately, with a deposit paid that day. That’s how quick it can happen and if you want to succeed, you need to be in the game because these quick opportunities are often great buys.
I hope this month’s column will kick-start you to take control of your portfolio and get yourself in a ‘buying ready’ position – with all your ducks in a row.
The onus is on you to make it happen, so take ownership, take responsibility and take action.