Our Portfolio

What is an ideal loan-to-value ratio?

By Bianca Dabu

In a short span of six years, Smart Property Investment’s Phil Tarrant had built a diverse property portfolio worth $6.15 million with a loan-to-value (LVR) ratio of 64 per cent. Is he going in the right direction?

According to Phil, his total debt position, including all the refinancing, sits at $3.915 millionwhich gives him a total equity position of $2.234 million on top of the cash sitting in an offset account.

“Running through these numbers… one of the challenges we have in our portfolio… is cash flow, and that's always a challenge, so we're fortunate that we've bought good properties which have delivered pretty reasonable yields,” he said.

“Our portfolio cost us a little bit of money before tax, and that's probably a nature of a growing portfolio. If we stopped doing what we're doing right now, in two [or] three years’ time, it'd probably be nice, neutral, even positively geared, but because we have the pedal down, we keep refinancing to secure our next assets, we're running in a before-tax situation, the portfolio's costing us a little bit.”

Buyer’s agent Steve Waters believe that Phil holds a pretty good portfolio despite its negative gearing.

He explains why an ideal loan-to-value ratio depends on the property investor’s “personal sleep-at-night factor,” and why he is reluctant to believe that Australian property markets are to experience “doom and gloom”:

Give us an overview of your portfolio.

Phil Tarrant: We got this portfolio. There's now 12 properties in it… We started off in North Saint Mary's, which is a suburb of the Blacktown Council… Then we're in Mount Druitt for two properties back-to-back—two two-bedroom apartments that we secured. Then we went out to Ambarvale, which is within the CampbelltownCampbelltown, NSW Campbelltown, SA area… Then we're in Cambridge Park, which is near Penrith. Then we went up to the Central Coast of New South Wales into Berkeley Vale. Then we secured a property… near Hornsby, and that's the most expensive property in our portfolio at the moment.

Then we moved up into the Queensland market. We purchased in Logan, then SpringfieldSpringfield, NSW Springfield, QLD Springfield, QLD Springfield, NSW. Then we secured an asset down in GlenroyGlenroy, NSW Glenroy, VIC, which is a suburb of Melbourne, and then we moved down into Wollongong. We secured a place in Port Kembla, and our most recent purchase was back up in Queensland—a place called KingstonKingston, QLD Kingston, ACT Kingston, TAS, which is part of the Logan Shire.

How would you describe your debt position?

Phil Tarrant: All those [properties] are at different levels of debt position… Our LVR across the whole portfolio is 64%, but when I look at that individually, we have some properties with LVR positions of 45%, and then we have some properties with LVR positions at 75%-ish. That's pretty common for a portfolio like this… to have that variance of LVRs on particular properties.

How did the properties’ debt position ended up varying?

Steve Waters: It depends on how much you've tapped the equity in it, and the figures are quite obviously showing the growth gravy train, so to speak, throughout certain areas of Sydney, and… Brisbane and the Central Coast. Some of these properties we haven't touched yet to utilise the equity position or the available capital… Some, of course, we have, so their LVRs will be a little bit higher, which is quite natural when you're perpetuating a portfolio.

Why do you believe that Phil’s portfolio is a good one?

Steve Waters: We can't lose sight of the fact that there's a couple of reasons why it's negative. There's one or two particular properties in there that are the bulk of the negative cash flow… We've continually, over the years, tapped the equity, therefore, increased the debt just to be able to perpetuate or leapfrog… into the next run of properties.

There's a very good chance that anyone doing the same thing you will run into a negative pre-tax cash flow position.

Is that a good strategy for property investors?

Steve Waters: Well, as long as you haven't exceeded what that threshold is in terms of negative cash flow, which is one of the important things when you very first sit down and put a property plan together—work out what is your tolerance for negative cash flow pre-tax.

When is a loan-to-value ratio deemed too risky?

Steve Waters: It's your own personal sleep-at-night factor. When you're beginning a portfolio, a lot of people… need to, perhaps, leverage a little harder than your portfolio as it matures, because capital's that finite resource, and so you need to utilise it to keep going. Once you get to a baseline of properties, you don't have to really ride that LVR position too high—depending, of course, on how hard you want to go, but I'm not a fan of continually being leveraged high. There's no safety in that… As you leverage higher with rates going up, your cash flow position starts to deteriorate as well.

Should property investors worry about “doom and gloom” headlines?

Steve Waters: I don't think you can just throw a blanket across the whole of Australia and every single one of its markets and think that there's some common factor there—there's markets within markets… The states are at different parts of the cycle more so than, perhaps, ever at the moment. Then when you drill down, if you look at the CBDs throughout the country, probably excluding Sydney, most of them are in an oversupply situation, but as you go out further to the suburbs and, perhaps, even more so the detached dwellings, they're still percolating very, very nicely.

Are certain property markets slowing down?

Steve Waters: Is there doom and gloom? I would think not. I think there'll be a softening of the market in certain areas, for sure, and there probably needs to be, and we're going to look at… periods of no growth for some years, which is okay, but… at the moment, it's all around finance.

How should investors deal with recent changes in the market?

Steve Waters: One of the most important factors of investing is the cost of money, and… at the moment, it's harder to get money as an investor. They're decreasing LVRs and they're tightening up on serviceability… calculations, and I think that's okay as well. There was probably a period there where money was a little loose, and they need to reel it in so that we don't go to this boom-bust scenario. Investors don't want that. We want longevity within the market.

Phil Tarrant: We want things to be sustainable… [When] things are sustainable, you can make them scalable, and that's the idea because property investment's creating wealth through property.

Tune in to Phil Tarrant’s portfolio update on The Smart Property Investment Show to know more about his acquisition costs, “boring” assets, risk mitigation, cash flow management and yearly income, as well as the inside scoop on a new property that could take the team’s investment strategy to the next level.

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  ["title"]=>
  string(72) "Mortgages in a tighter lending economy and why Brisbane is a good option"
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Tune in to the latest episode of Property Showcase, the podcast with the inside track on the products and businesses that will help turbocharge your portfolio, maximise returns and make your overall investment experience seamless and stress-free!

" ["fulltext"]=> string(818) "

To hear more about these services, make sure to tune in to this episode of Property Showcase!

 Make sure you never miss an episode by subscribing to us now on iTunes!

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Son Pham is the accredited Head of Mortgages at Rethink Financing\/Rethink Investing. He has over 6 years\u2019 experience writing loans, over 12 years in the wealth management industry working for the likes of CBA, AMP and private practice and he is also a licenced financial planner (AFSL 326450). He has multiple investment properties that are cash flow positive which help pay his mortgage on his home and fund his lifestyle.<\/p>\r\n

Son is able to write all types of residential and commercial property loans.<\/p>\r\n

In this episode of Property Showcase, head of mortgages at Rethink investing Son Pham joins host Tim Neary to unpack how an investor should approach getting a mortgage in place with banks tightening down on serviceability.<\/p>\r\n

Hear from\u00a0Son\u00a0about:\u00a0<\/p>\r\n

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  • The pitfalls that he has seen people get into<\/li>\r\n
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    Whether it\u2019s building a successful property portfolio or investing in one of their Development Funds, Open Corp can help you through every stage of your investment journey. The team has 40 property specialists who collectively have been involved in over $4 billion worth of property transactions and the acquisition of more than 8000 homes and investment properties.<\/p>\r\n

    In this episode of Property Showcase, director of investment services for Open Corp Michael Beresford,\u00a0joins\u00a0editor of Real Estate, Tim Neary to share why he disagrees that the cooling market means that the best times are behind us.<\/p>\r\n

    In this episode, hear from\u00a0Michael\u00a0about:\u00a0<\/p>\r\n

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Mortgages in a tighter lending economy and why Brisbane is a good option
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Will Magee has had ambitions to enter into the Australian property market for quite some time, but it has been more than just finances holding him back.  Having been granted permanent residency just two weeks ago, Will is wasting no time and is now in the process of signing papers and finding his first investment property.

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In this episode of the Smart Property Investment Show, Will joins host Phil Tarrant to share why he is purchasing his first property in partnership with his brother, discuss the complications that can arise from such a strategy, and unpack the ongoing plan for building a joint property portfolio with his brother.

Will will also share how they approached saving for their first property, why he is taking out the mortgage in his name exclusively, and share their savings plan for the year ahead.

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:

From property in Australia to a ski lodge in Japan
Mortgage Trusts, an alternative first step for property investors
Should a real estate title be in one person’s name only?

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Median house prices in regional Victoria outperformed that of Melbourne in the June quarter, the latest REIV figures reveal. 

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Median house prices in the regions rose 4.0 per cent to $419,500 but in Melbourne they dipped by 0.6 of a percentage point to $840,000.

The result in Melbourne was due to a 0.8 of a percentage point fall in prices achieved at auction; this was despite a lift of 2.3 per cent in private sales.

Inner Melbourne suffered due to auction prices, where median prices fell by 4.9 per cent to $1,459,000 but it was middle Melbourne that was hardest hit, with a 5.4 per cent drop to $974,500.

Outer Melbourne had a good quarter with the median rising by 0.5 of a percentage point to $681,000.

Apartment prices in regional Victoria grew by 3.7 per cent to $304,500 while the metro media was up by 0.5 of a percentage point to $604,000.

REIV President Richard Simpson said that despite fewer sales, many sectors of the market were performing well.

“2017 was a bumper year and while the trendline has flattened, despite the fall in median house prices in the June quarter, median prices are still up this calendar year for both houses and units, in Melbourne and in the regions,” Mr Simpson said. 

In particular there was been strong growth in regional centres which is probably due to the first-home buyers’ concessions said Mr Simpsons.

“The first-home buyers’ concession has been a boon for regional areas. A new entrant to the property market buying a house at the regional median will pay no stamp duty, while a first home buyer of an apartment in Melbourne at the median price would pay stamp duty of nearly $25,000,” he said.

Mr Simpson said that more prospective buyers are looking towards regional Victoria which is also having an effect in Melbourne.

“Melbourne’s outer perimeter continues to grow. Small increases in the June quarter mean that the median prices for both houses and units have risen over 10.5 per cent from a year ago.

Mr Simpson said moving forward that vendors need more realistic expectations as the highs of 2017 are now over.

“Negative chatter about the future of the sector coupled with stronger lending controls by financial institutions has created some uncertainty and vendors need to be realistic with their price expectations,” Mr Simpson said.

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Regional Victoria showing up Melbourne in price performance, new data finds

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