Property Investing/ Property Advice:Series 2 of 7; Series 2:Tailored Plan: Part 2.
I believe you must engage a Buyers Agent with every property purchase, Using a Buyers Agents/Buyers Advocate and Property Advisor is key to more property investment success. These are extracts from my latest book “The Australia Property Investment Handbook 2018-2019”. In all good book stores now. Also Read Property Finance Made Simple and Property Investing Made Simple.
Most investors do not earn enough to afford to buy 5-7 properties in blue chip suburbs without regard for cash flow from those properties. Most people do not earn 200k+ a year, their job stability is not 10 out of 10, they do have fear, and lack knowledge and experience. People need help to invest in a practical way to suit them and their specific needs, not an ideological single strategy fashion, bereft of suitability and sustainability to them.
Cash flow properties are not necessarily wealth creation properties. They do, however, provide greater income while you are growing your portfolio, therefore allowing a property investor an increased capacity to continue to borrow. If the focus is only on capital growth properties, the ability to continue to borrow money will diminish, ultimately; they would run out of income to service the loans. If an investor could no longer borrow money, it would not matter how much equity they have, as they’d be unable to access it.
It would be too easy, and very wrong to base a decision on just one property. There are several considerations to bear in mind. Besides your exposure to the future cost of debt and receiving tax deductions, affordability to purchase more properties – whilst enabling you to continue to reduce your mortgage on your home – is very important. Combined, they provide hope; hope toward a brighter retirement, having done something rather than nothing.
The risk with only a capital growth strategy is the amount the borrower could be out of pocket while holding the properties. In a rising interest rate market (rates for investment loans) the risk grows. There’s no point buying a capital growth focused property if there is a clear and present risk that in the near future the property will need to be sold. Job uncertainty, tightening lending policies, lower borrowing capacity and risk of having to sell the property due to unforeseen circumstances is much higher. Changes to negative gearing are already problematic with established properties.
In one report by J.P Morgan, it was revealed that finance for more property purchases was no longer possible for up to 10% of ‘would be’ investors.
Lenders used to account for borrower’s existing debt with other lenders by using actual repayments to determine the borrower’s cost of debt. On an interest only loan of 500k in 2016, the repayments might have been $22,500 pa. Now, lenders are adding a buffer on top of the borrowing capacity calculator, and converting the interest only repayments to a figure based on principle and interest, as they always have done for the new loan being applied for. The same 500k debt in 2017 would have a cost associated to it of $41,500 pa, based not just on a higher qualifying rate but also principle and interest repayments, even though the investor may be paying interest only. This is $19,000 more in income the borrowers need to have to afford the same debt on a bank’s calculator as they previously could have. Imagine they only purchased capital growth properties and none of them were cash flow focused properties, the strife this investor would be in, and on two main fronts.
- Not being able to borrow as much and/or
- Maybe being forced to sell one or more, due to rising rates, and rising holding cost of debt