Henderson.

The Hardest Part of Investing in Property!

What’s the hardest part of investing in property? Most people think that it is finding the right property that is going to perform well over time.

However, the reality is that the hardest part of investing in property comes well before you even start looking at potential purchases. The reason that most Australian’s don’t own any property and that only a small fraction ever own multiple properties is because of borrowing capacity.

There are two elements to borrowing capacity that can severely limit your ability to build a large property portfolio.

Income and Expenses

The first part of the picture comes down to your income and expenses. Most people assume that because they are on a good income, their ability to borrow will also be strong. Unfortunately, most don’t consider the impact of living expenses.

For example, if your combined income with your partner is $200,000 per year, you might potentially be able to borrow up to $980,000.

If you also take into account regular ongoing expenses, such as an annual holiday that averages around $10,000 each year, that could quite easily reduce your borrowing capacity by $150,000, leaving you with $830,000.

The same process applies to things like car loans. While it is nice to drive the latest car, the reality is those types of debts can take a significant amount away from your borrowing capacity.

The higher your living expenses, the harder it is to get finance, which will severely limit your ability to grow a property portfolio over time.

How You Buy

The second element that restricts property investors from growing a large portfolio, is the way in which they construct their portfolio in the early stages.

Many Australian’s only decide to buy a home when they are ready to settle down and start a family. Invariably, they use every cent of their borrowing capacity to purchase the best family home their income and expenses will allow for.

When they start a family, expenses continue to rise and with a mortgage hanging over their heads, many are simply not able to access any more finance – stopping their property investment journey before it really begins. It’s for that reason, that most Australian property investors really only own one property, which is their family home.

In recent times, we have seen more Australian’s change the way they do things by rentvesting. Rentvesting is effectively buying where you can afford and renting where you want to live. This is a way to get the best of both worlds and it can help with the borrowing capacity restrictions that most investors eventually run into.

The other side of the story is the order in which you purchase properties.

If your first property investment fails to perform and doesn’t grow in value, your equity will remain virtually flat. That severely limits your ability to grow your portfolio as it will be reliant on further savings if you want to keep on investing.

One of the most powerful features of property as an asset class is the ability to draw out equity that has been created to invest in other properties. If a property hasn’t grown, this part of the process is removed.

Building a large property portfolio takes time, but is important to understand the real hurdles that you will have to overcome to get there which is normally borrowing capacity. The most important part of the process is getting a clear understanding of your own personal situation and building a plan around how you want to achieve your goals.

Working with a buyers agent is one of the most effective ways to not only identify properties that have a high probability of growth, but to also construct a portfolio that will allow you to navigate the invisible ceiling of borrowing capacity.

When you know,

We know how.