our-portfolio

How we'll continue to build our property portfolio

By Phillip Tarrant
Mount Druitt investment property

It’s important to continually reflect and analyse where you are when it comes to building your portfolio, not only to ensure you’ve got checks and balances in place to highlight any areas of concern, but to also fire you up and keep you motivated to build it further.

Previously, I have reported on a property we recently purchased in SpringfieldSpringfield, NSW Springfield, QLD Springfield, QLD Springfield, NSW, Queensland.

This is the second property we’ve bought up there and I’m very bullish about the prospects for us to add value through a cost-effective renovation. We purchased the property well under market value – giving us instant equity – but with a few well-placed renovation dollars I’m confident we can accelerate its value via this manufactured equity.

I’ll write about the renovation of this property in future editions of Investment in Action. This month I wanted to discuss our attitude towards planning and goal setting, and our objectives for the period ahead.

Pause for breath

I’ve spent a fair bit of time recently with Ross Le Quesne, our mortgage broker from Aussie Parramatta, talking about our buying plans.

As well as writing this column for Smart Property Investment each month, I travel around Australia presenting our Investment in Action series, detailing our experiences while growing our portfolio. Mr Le Quesne often joins me on stage in a panel of our ‘A Team’ – the professionals who help us grow our portfolio: our accountant, buyer’s agent and depreciation expert.

Mount Druitt investment property
Our Mount Druitt investment unit has experienced excellent growth

I get a lot of time to chat with Mr Le Quesne when we’re on the road; we talk strategies, experiences with buying property (he’s also an investor with multiple properties), and the market in general.

Running on the back of a recent trip to Brisbane with Mr Le Quesne for the Home Buyer and Property Investor Show, I reconvened with him in our offices to put down some hard and fast plans around our goals and objectives moving forward. It’s nice to talk about it, but you need to get the points down and ‘actionable’!

The immediate concern for us in building our portfolio is to get a pre-approval in place so we’re ready to buy when the next property comes up. It’s pretty straight forward stuff but it requires some work.

According to Mr Le Quesne, financing shouldn’t be a problem for us moving forward. However, as we invest in a trust structure we need to be on our game to deliver the right documentation to secure financing, as well as be discerning with the lenders we choose to finance through.

A lot of lenders don’t particularly like borrowing within a trust structure – they don’t have the polices in place to deal with it or they simply don’t have the appetite.

As we have a significant amount of debt, there are also parameters in place in terms of their ability to approve financing with lender’s mortgage insurance (LMI) without having to refer to the mortgage insurer. This is something we need to be conscious of when choosing or refinancing with certain lenders.

We’re fortunate that Mr Le Quesne bats for our team and will work with lenders to explain our structure and arrange financing. And I’m confident we can secure financing to support our growing portfolio.

That leaves us with the process of planning the development of our portfolio.

Our strategy of buying under-market- value properties in lower-priced areas with good growth indicators – and then undertaking a cost-effective renovation to boost the property’s value – has been a good one

Available equity

As we sit right now, we have access to just over $500,000 should we refinance our entire portfolio at 90 per cent.

We’re not going to extract all that equity in one hit, but in terms of growing our portfolio we can do a lot of damage with $500,000.

I don’t believe in continually milking a property to realise its capital growth. Refinancing the property once is fine – and we often do this to extract the funds originally channelled into the property – but remember property is a long-term game with the goal to grow equity.

We have properties in our portfolio at various stages in the cycle. Some have only been recently refinanced, whereas others have not been refinanced at all. This balance is important as it means we’ve always got some equity on hand to extract to help us finance the next purchase. But this takes planning.

Analysing our portfolio with Mr Le Quesne highlighted a number of opportunities for us and made us think in terms of the next stage in the growth of our portfolio.

We’ve done very well in the western suburbs of Sydney, where the bulk of the properties in our portfolio are. We were active in this market for around two years, snapping up under-market-value properties before the surge that hit the west took hold.

I feel we were in the market at the right time before investor interest truly picked up pace, and we’ve done well as a result.

We have both houses and units in the western suburbs. This market is too hot now and I feel fortunate that we hit it at the right time. We’ve ridden the growth in the market and will capitalise on that through refinancing or sale, should we go down that route.

This strategy of buying under-market- value properties in lower-priced areas with good growth indicators – and then undertaking a cost-effective renovation to boost the property’s value – has been a good one. It’s not an overly complicated strategy either, or open to significant risk.

For us, areas of Brisbane show similar patterns to those we have seen in western Sydney, and we’re capitalising on that market.

Our latest purchases in Woodridge and Springfield should deliver the same returns we’ve witnessed in the western suburbs of Sydney and we intend to hold these properties over time to realise the true force of a growing market.

Springfield investment property
Our Springfield property has good renovation and value-add potential

Our first option as investors is to keep doing what we do – whether that’s in the Brisbane market or in other markets that show the same patterns and indicators that meet our strategy.

The other option is to shift our focus and look to capitalise on our growing equity base to move into bigger projects or to elevate the price points we currently operate in. For example, we could identify and buy under-market-value properties in the $600,000 to $700,000 range.

There’s a lot to be said for developing a strategy and staying true to it – whether business, relationships or buying property. It’s all too easy to get distracted with the best new thing or to be tempted by ‘not-to-be-missed opportunities’.

I see this quite often in my discussions with investors and talk about it at length when presenting to our readers. Our accountant also has numerous stories about people moving off strategy and getting saddled with underperforming properties that effectively put a halt to their portfolios.

If you pay too much for a property, what is the real impact? Best case, while it should go up in value over time, you might have to wait five or even 10 years before it catches up with the market. That’s a long time to tie up valuable funds in a single property.

Worst case, it could financially cripple you.

Keeping the course

So what will our strategy be? We’re at a point right now in developing our portfolio where people often come unstuck.

We have the capacity to continue to buy the properties we’ve traditionally targeted, and for me this makes a lot of sense.

But we’re also a lot more mature as investors. We’ve got nine properties in our portfolio now and we’ve also done a number of successful renovation projects – some big, some small.

I’m prepared to back myself to expand our capabilities as investors and seek small-scale developments to energise our portfolio and accelerate our buying. This might consist of a sub-division, a knockdown rebuild, a small townhouse development, or the acquisition of a small unit block that we can strata and renovate.

The opportunities are considerable. However, one thing I’m sure about is we’ll still stay true to our strategy of purchasing under-market- value properties in growth locations within the $200,000 to $350,000 range.

I hear numerous stories about people moving off strategy and getting saddled with underperforming properties that effectively put a halt to their portfolios

We’ll keep to our strategy; we’re simply expanding it by adding a little scale to our portfolio, helping us confidently build at a quicker pace.

Yes, there will be some challenges when it comes to financing and loan-to- value ratios (LVRs), but we’ve got a good team on side to support and motivate us.

We’ll be nimble and act confidently to ensure we maintain our portfolio’s growth, its integrity, and importantly, help us to continue to build wealth.

I look forward to sharing the continued development of our portfolio with you.

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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.

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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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New data from Mortgage Choice shows that property buyers continue to choose variable rate home loan products, as demand for fixed rate home loans fell for the eighth consecutive month. 

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According to the company’s latest national home loan approval data, variable rate home loans accounted for over 82 per cent of all home loans written throughout May 2018 — up over 2 per cent from the month prior, and almost 7 per cent higher than the 12-month average.

Mortgage Choice CEO, Susan Mitchell, said this trend will continue as borrowers develop apathy towards the RBA’s stagnant cash rate.

“Indeed, we continue to see borrowers opt for the flexible nature of variable rate home loans which may offer a redraw facility, offset accounts and the ability to make extra repayments. These features are not typically associated with fixed rate loans.

“While a fixed rate product provides repayment certainty, variable home loan rates have been relatively stable for a prolonged period of time giving borrowers little incentive to fix.”

This week’s Housing Finance data from the Australian Bureau of Statistics found that 52,116 home loans were approved throughout April, down 1.4 per cent from the previous month.

Ms Mitchell said she is unsurprised that the value of investment loans dipped — falling 0.9 of a percentage point to $10.7 billion in April.

She said this could reflect tighter lending standards and serviceability policies.

“However, May data may show an increase in investment loans following APRA lifting the cap on investor loan growth at the end of April,” said Ms Mitchell.

Ms Mitchell also noted that the number of first home buyer commitments as a percentage of total owner-occupied housing finance commitments rose to 17.6 per cent in April 2018, from 13.7 per cent in January 2018.

“This increase is significant and first home buyers seem to be propping up the market.”

Ms Mitchell said she expected home loan demand would be maintained.

“[Due to] a combination of factors, such as historically low interest rates, easing property prices and access to FHOGs.”

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Buyer ‘apathy’ behind mortgage preferences
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The Australian property market is arguably in a softening phase, and this can have both positive and negative effects for property investors.

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In this episode of the Smart Property Investment show, Real Estate Gym’s Tom Panos joins host Phil Tarrant to discuss how investors can take advantage of this decreasing market by leveraging off of the reduced urgency in the sales process.  He also discusses the importance of researching up to date sales data before investing and looks at the state of the Australian property market as a whole.

With many property investors also selling property throughout their journey Tom reveals the best months to buy property in Australia, shares his thoughts on why an auction is not always the best method of sale and how as a purchasing decision it can lead to over-paying.

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:

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The benefits of investing in a decreasing property market

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