Henderson.

The Fallacy of the $10 Million Property Portfolio

If you’ve paid attention to the host of property experts out there, you’ve probably heard more than one suggest that it’s possible to build a $10 million property portfolio, where you can then sit back and live off the passive income.

Unfortunately, too many people believe the hype and then go about building the wrong type of property portfolio.

Building a large property portfolio like that might have been possible 15 or 20 years ago, but these days, there are a couple of things that the property gurus conveniently forget to mention.

The first key thing is that you’d need to have a very high income to be able to service the debt on a portfolio of that size.

Lenders don’t assess rental income in the same way they do as your wages or even business earnings. Rental income is assessed at around 60% – 70%, which takes into consideration things like property management fees, strata fees, rates and insurance just to name a few.

So immediately your 4% yield is cut back to under 3%. That’s before you take into account the fact that you need to pay the debt and without even considering the tax you have to pay on any rental income.

On a $10 million property portfolio with $7 million debt, you’re going to need more than $1 million in annual income, to be able to service that kind of debt. That’s even with today’s record-low interest rates.

If you’re earning a combined income of $150,000-$250,000 you can probably really only afford to hold 3 – 4 properties before you run out of serviceability. So anyone telling you that you can build a $10 million property portfolio from an $80,000 income is not telling you the entire story.

Many of the top-tier lenders also have something called a debt to income ratio, which will also mean that your debts won’t be able to be more than say 7-10 times your income. If you’re on $80,000 per year, even being able to borrow $1 million from these lenders will be tough.

It’s all serviceability now. You can have a million dollars in the bank, but if you don’t have a job you’re not borrowing a thing.

I recently sat down with one of the leading mortgage brokers in Newcastle and looked at exactly what the banks will lend based on different income levels and it is simply not possible to build a huge portflio from a modest income these days.

So, knowing you can’t borrow a lot of money, you need to make sure the money you do borrow goes to its best use, which means making sure you get the best quality assets. 

If you can only buy two or three properties over the next 15 years, you want to make sure those properties are the best property that you can buy for that money.

That’s why it is so vital to focus on quality and location and focus less on how many properties you’re holding. 

Asset selection is the most critical factor when buying a property. You can buy one really good property and it can do a lot better than buying three average properties.