What is an ideal loan-to-value ratio?
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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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What is an ideal loan-to-value ratio?
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