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How to overcome investors’ ‘3-property ceiling’
Investors unable to expand their portfolios should break the “three-property ceiling” by focusing on building capital faster and recycling borrowing capacity, according to two property mentors.
Results Mentoring directors Simon Buckingham and Brendan Kelly sat down with The Smart Property Investment Show host Liam Garman to discuss how investors can break the “three-property ceiling” and build more wealth.
Buckingham and Kelly said the three-property ceiling refers to the point at which an investor cannot grow beyond three properties, generate enough cash flow, or secure additional bank financing.
“It's where you've extended yourself so far that you have to wait so long. Usually, you run out of time for your investing career or your life, or you run out of time for your employment before retirement,” Kelly said.
Buckingham said the issue was a result of the traditional approach to investing, which meant buying property and holding it for the long term.
“People get trapped because they only know one way of approaching their investing – ‘I'm going to buy it, hold it, never sell it, hope it goes up in value, it'll probably be negatively geared, and I might get some tax deductions from that along the way’,” he said.
“But that capital growth and trying to leverage out the growth doesn't work for building a multi-property portfolio because you run out of borrowing capacity, accessible capital, or time before you get beyond that, two to three properties.”
He said many investors build equity-rich property portfolios that increase in value, yet banks often refuse to lend against them if their income can’t support the debt repayments.
“You have to figure out, well, what do I need to do differently to most people so that I'm not stuck?”
According to Buckingham, to build a multi-property portfolio over a short time frame, investors should be open to selling and recycling their borrowing capacity.
He said investors should first determine whether they’re likely to hit their borrowing limit or run out of capital, then focus on building their cash and equity base to have the funds to invest, allowing their assets to compound and grow into a multi-property portfolio over time.
He noted that the strategy differed from a traditional approach, as investors focus on creating more capital before committing to holding properties, thereby building up more capital.
“As you get a critical mass, you start to selectively hold properties while preserving some working capital to be able to do other deals,” he said.
“If building that equity is going to require selling a property to recycle, reuse and then compound that equity into the next one, then maybe that could make more sense than just stubbornly refusing to sell it.”
According to Kelly, investors should also aim to start small and avoid taking on large projects, such as multi-story unit apartment blocks, as their first property.
“Build on what you learn in your first, build on the skill, build on the knowledge and build on the confidence that you get out of doing the first one,” he said.
“Then from there expand into a project which is maybe slightly more expensive or slightly more complex in nature to create a profit.”
Additionally, when selling an asset, Kelly warned investors not to act impulsively or put their entire portfolio on the market, advising them to think strategically based on the numbers.
“The invitation here is, think about the end game that you want for your life, and based on that end game, now have a look at everything you've done in your time up to today,” he said.
“Is more of the same going to get you what you want? And if you go, ‘actually I'm not sure it is’, then a change might be required and therein lies the invitation.”
Ultimately, Kelly urged investors to start thinking differently about their property journey and to consider what changes they would need to achieve their objective.
“This is all about you making a more conscious decision around what it is that you're looking to achieve relative to the outcome that you're after,” he concluded.
Listen to the podcast here.