Less speed? More haste? How quickly should I grow my property portfolio?
Everyone wants to get rich quick! And at certain points in the property cycle, (like the one we are at right now), many property investors get swept up in all the media hype of a market that is talked about as ‘bubbling with buyer activity’. They race in, all guns blazing, to snap something up lest they ‘miss out’ to the competition and let the excitement of a frenzied bidding war get the better of their budgets at weekend auctions.
It’s seemingly human nature to want what everyone else has and feel that what we possess is somehow never enough. If you have 2 properties you want 4. When you have 4 you want 8.
But when it comes to investing in bricks and mortar, there are certain lending issues to consider when building a substantial property portfolio, particularly if you plan to do so in a relatively short timeframe.
First and foremost you need to consider all the risks associated with having a substantial property portfolio, namely interest rate exposure and experience.
Interest rate exposure
There are a number of ways to manage your interest rate exposure including:
- Fixing the interest rate on a portion of your debt.
- Making extra repayments while interest rates are low. This is particularly relevant right now and something for investors who are in the latter stages of their accumulation phase to really consider. Doing so will reduce your outstanding balance and allows you to redraw funds when cash flow is tight (assuming a redraw facility is available).
- Do not over extend yourself. Ensure your rental and other income will more than adequately cover your repayments; even taking into account potential interest rate rises before taking out the loan.
ProSolution always advise clients to consider what their repayments will be if interest rates increased by 1% or 2%. Again, this is an important point in today’s low rate environment where many investors are taking advantage of ‘cheaper’ credit.
Your own experience counts
Secondly, consider your property investment experience. As the old adage goes, “there is no substitute for experience”. There are many ways to deal with this risk such as:
- Use the expertise of a property consultant/buyers advocate to identify a smart property investment addition to your growing portfolio.
- Find a mentor who has travelled the road you are taking and learn as much from their mistakes as you do from their successes; someone who has built a substantial property portfolio from the ground up.
- Take your time. There is nothing wrong with taking it slow and learning as you go. After all Rome was not built in a day!
How lenders look at ‘impatient’ investors
While lenders are certainly pulling out all the stops to secure the bevy of new business coming their way in the current market, they can have some issues with investors who want too much too soon when it comes to accumulating a substantial property portfolio, including:
- Reliance on rental income. Obviously if you diversify your income streams, you will reduce your overall risk. While it might seem unlikely at this stage in the game, you need to consider the affect on your financial position if there is a downturn in the rental market and rental yields drop, or what if your property sits vacant for an extended period of time? Furthermore, lenders like to see a strong history of reliable income streams to reduce their risk exposure, providing additional peace of mind over the likelihood of continuing sufficient income to service your investment debt into the future.
- Geographical spread of your assets. Lenders do not look favourably on a concentration of property in one area or development. Geographical diversification reduces overall risk.
- Your investment experience. If you have a strong history of property investment, the banks will be more comfortable lending to you. However if you are just starting out, they may be more concerned. Showing that you are a sophisticated investor by the way you go about your investing (e.g. use of advisors, the way you manage your risks, the level and type of analysis before a purchase, etc.) may help you secure finance.
- Exposure to one client. For example, they may cap the amount they will lend you to $2 million. Recognise that you may have to use a number of lending institutions and loan products to secure the necessary capital.
Be the tortoise
While it may not be as sexy and ‘Trump-esque’ to build your investment portfolio at a snail’s pace, the fact remains that the accumulation phase of your property investment journey needs to be well thought out and logistically sound.
Most successful investors have not fallen into their riches overnight. They took time to assess their position and risk profile, establish sound, detailed financial goals and then put in place a well thought out strategy around those objectives.
They then fortified that planning with a strong team of advisors to strengthen their overall position and capacity to safely acquire smart investments.
There’s not necessarily anything wrong with picking up the pace every now and then, particularly if you are starting out on the accumulation phase a little later in life, but the key is to never try to outpace the ‘competition’ and always ensure any move you make and any property you purchase, fits your overall investment strategy.
For more information on how you can profit from investing in Australia’s residential real estate sector by establishing clear investment goals and strategies, click here to contact us, or subscribe to receive regular post updates and industry insights.
Stuart Wemyss is a chartered accountant and founder of Property Tycoon Finance. Email: firstname.lastname@example.org
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