How Increasing Income is the bullet-proof strategy for property investors today

Most investors have the goal of increasing wealth and financial security. In the current investing climate, many investors are beginning to find this harder to achieve. For those seeking to continue to grow in the backdrop of this investing climate, it may be time to change focus from investing returns to finding ways to increase income.

The purpose of this post is to educate investors on how increasing income can help borrowing power & investment portfolios. I certainly appreciate increasing income is not easy or even possible in many cases. Nonetheless, having the information out there about the power of additional income may be of use.

Increasing income is the one bullet-proof way for investors to protect themselves against any finance market changes. It is also the fastest way to accelerate plans towards financial security and a good risk mitigation strategy. Increasing income is a solution to the potential P&I cliff investors face. Importantly, it is also the best way to get more money from banks.

Investors have a serviceability ‘wall’ that is the maximum lenders are willing to lend to. There are techniques investors can use to expand their borrowing power (e.g. removing credit cards, strategic lender selection). However, these techniques can only help expand borrowing power at the margins. Most investors have a borrowing power wall that’s fundamentally tied to the income they earn.

A common misconception of new investors is that ‘saving’ is the way to generate large amounts of wealth. While ‘saving’ more of your income will help generate stocks of capital to use as deposits, it has little impact on your borrowing power. Lenders will take minimum ‘floor’ assumptions about your expense profile, regardless of how frugal you are. Also, the amount you save is capped by the amount you earn.

On the flipside, for advanced property investors, looking to build large investment portfolios and continue to accumulate over time, there is no substitute to increasing your income over time. Increasing income improves borrowing power & has no real upper bound (ask Bill Gates!)

Below we have modelled out maximum borrowing capacities for different income profiles to illustrate the power of increasing income.


The above chart shows a couple’s combined gross income. This couple rent at $400p.w, earn a 50/50 split of income, have minimal living expenses and have a $6k credit card. The green bars show their borrowing power with mainstream lenders. The red bars indicate additional borrowing power they may be able to obtain from non-bank lenders with more generous borrowing power calculators. Note that this modelling was completed in June 2017 and there have been minor lending market changes since then.

Some strategies property investors can use to add to their income & borrowing capacity include:

• Improving their investment portfolio’s yield profile. In the below chart, increasing the portfolio yield from 3% to 6% can have a 50% rise in an investor borrowing capacity overall.

• Adding a secondary income source – investing in property is far more limited when relying on one income. Whether that be a second job or combining with a partner, additional income sources can propel investors servicing forward. Note that all income sources are not treated equally by lenders, so some increases in income are more powerful than others. For example, base salary income rises have a multiple around 7, while rental income & non-base income rises (overtime, commission, bonuses) has a multiple closer to 5. Therefore, for most, increasing base salary is a little more powerful than rental income.

Of course, increasing income is very difficult to do in practice and is far easier said than done. Nonetheless, I personally believe increasing income often starts by having an attitude of targeting income increases. This attitude was less important a few years back to generating wealth (investing would do it alone and finance was easily available), but in current economic conditions, it’s becoming more important.

Increasing income can be a ‘strategy’ that successful property investors start to look to shift to over the next few years.

 

Increasing income has always been the way to increase serviceability.

 

Increasing income often comes back to a mindset around money and even tied in with internal self worth. Continually renewing via new information and therefore challenging your current mindset will help you address any blockages.

Think of ways to create an online or offline "side hustle" to achieve this.

 

Excellent post @Redom
This topic is too overlooked as a strategy.
It takes a form of personal investment to improve oneself to improve ones income.
The goal should always be to work for a higher rate, not work more hours for the same rate.

 

NG not gonna be happy with u ask them to invest in PG investments .

i always said this.

PG wins everyday.

 

Great insight @Redom love seeing the data, thanks for sharing.

 

Nice and all but if the market as a whole is cut off at the knees due to restricted lending what is the point of investing in the market at all? Rising tide lifts all ships...there will be no tide with these restrictions in place for a long time.

 

I can see price stagnation in most markets for a number of years but if large scale developers have trouble getting future projects going then in several years we may see rental vacancies really tighten.

Rents have barely kept up with inflation, some investors may be deterred from entering the market therefore leading to an undersupply. It could take a number of years to play out but presently there is too much investment in residential property.

I remember buying property in the mid 90s, property investment was nowhere near as mainstream as it currently is, yields were much more attractive, rates were higher but not significantly so.

Higher rents will increase borrowing capacity very slowly but I can see it happening once oversupply problems are contained with a growing population.

 

I want to increase my income to the point where I don't need to invest......in anything.

I need to become a CEO of something. First I need to think like a CEO. There's a few co workers who think they are CEOs......I pinch their milk and coffee nearly everyday.

 

Aren't youse the CEO of the Druie progress association and me pay cooperative?

 

Hi Redom,

Is the income in the chart just salary and wage income or does it include rental income?

E.g if your wage is $150k and total rental income is $50k then total borrowing capacity is based on the $200k income?

Further, if that $50k rental income was a 5% yield, then assuming you had $800k of debt, borrowing capacity is a further $1.2m (total $2m)?

 

Yes, started a thread “how I increased my income” still working this

 

Wage/salary. Rental income is factored in via each yield profile for each income listed. So the 100k list is a 50k/50k income profile

 

Yes... but even more effective is using the increased income to reduce debt - particularly non income producing, non deductible debt. I have posted extensively , and in great detail, about the benefits of using cash cows for dividend reinvestment/debt reduction , for several years .

You see, one off increases to income may improve borrowing capacity in the short term, but without reducing debt as well, when the new improved borrowing ceiling is met you are still back to square 1. ie Borrowing capacity is exhausted, and you are left trying to increase income again in order to move forward. It's fools gold without debt reduction. By employing an ongoing debt reduction/dividend reinvestment approach with the extra income , you are ensuring that not just short term capacity is improved. You are ensuring that debt is constantly being chipped away at as well. That's the real key to a permanent structural improvement to your portfolio building capabilities.

Further, I would argue that in an environment of extremely low wage inflation, which appears to be well set in , increasing income from wages or salary by the amounts required to have a real impact is simply unachievable for most... What the post doesn't specify is that you need an extra 50K or thereabouts, per million borrowed- just to restore your capacity to pre APRA levels. So lets be very clear; a 3,4,5 or even 10K wage rise wont do much for an investors borrowing capacity unless it is specifically used to reduce debt over time. But it will work wonders over time if it is used this way. Reinvesting the extra income for debt reduction is the real key in all of this. Getting the extra income is of itself, of little value to improving your portfolio building capacities unless it is used for debt reduction purposes.

This is precisely why for several years I have argued the merits of pursuing a dividend reinvestment/.debt reduction strategy using cash cows. it is a strategy far more accessible to all than large pay rises .

Anyone with a modest portfolio and a PPOR mortgage will see massive benefits from this approach. And even those without a PPOR mortgage will see benefits. Use P&I from Day 1 and repay the cash cows in 15 -20 years...ensuring a passive income for life. Its just such a no brainer - almost guaranteed to produce an outcome that the pre APRA generation couldnt achieve despite 30 years of advantageous conditions. Mystifies me that people are still in denial about the new world of credit and continue to pursue speculative, weak yielding strategies and hoping a big pot of capital growth will be waiting for them at the end of the rainbow.

PS - to the naysayers about dual occ cash cows . You said no one would want granny flats in Orange or Bathurst. Wrong. There are now waiting lists. Most recent dual occ settled at 1230pm on Monday and tenant moved in at 3pm same day.

To the naysayers - you said regionals offered no growth. Wrong again. My dual occ clients, who paid between 530-550K have had their properties revalued at 620K +... just 9 months later

To the naysayers - you said rental demand would be weak. Wrong yet again. My dual occ clients have seen rents climb from $620 per week to $665 per week in 9 months

#aheadofthecurvesincewellbeforeAPRA

#cashcowskilldebt

#decadetodeleverage

 

Makes complete sense!
The biggest way to increase borrowing capacity is increase income.. Another way to increase a property portfolio or cash-flow (which ultimately for me is the aim of property or any investing) is think of creative strategies i.e. development, granny flats (not always a great strategy), renovating etc

A question on the graphic @Redom is does this change if someone already owns say 1 - 2 properties or is the max borrowing capacity the same i.e. if you have 100K household income with a 6% yield your total borrowing capacity would be 715K with mainstream lenders?

I'm curious working as a broker myself and being an investor too!

 

Are youse tellin' me that with 450k rental/salary income.....you can borrow $7m plus?

 

So far this just isnt supported by facts. I would agree that there may be no material growth in expensive markets for many years, but tides are made of water, and money ( just like water) will always find a way through barriers .... in this case the money ( water) will flow into cheaper markets such as Adelaide and Perth and regionals...

Already we have seen large NSW regionals fire up. Orange and Bathurst are cranking. Port Macquarie is cranking. Just watch what Perth does in the next couple of years...watch it start to take off.

Even if its just for self preservation, its going to happen more and more as investors with immature portfolios offering weak yields and who cant increase rents materially or increase wages, with P&I re-sets coming their way, realise they need to get extra cash flow somewhere or else they need to sell. Only arrogance or stupidity or putting the cue in the rack would get in the way of this, in the face of the bleeding obvious - post APRA servicing calcs .

 

But are these areas firing up because of really good fundamentals , or just lots of investors in Sydney and Melbourne that have reached their serviceability limit for getting finance and are now looking for options in cheaper regions where they can stay within the limits set by the banks.
Or is it the younger people that have been forced out of Sydney in search of a home that they can comfortably afford.

 

Everything I do. Everything I believe...all based on a high level knowledge of servicing calcs.
No luck. No magic potions. Just an absolute belief that borrowing capacity and credit availability are what drives property, and that debt reduction is 100% essential to growing a portfolio.

I dont care about guessing. I dont care about speculating. I dont care about the things that people had success with pre APRA. I only care about what APRA has changed, and what is required NOW to grow a portfolio, pay of a PPOR and get to a 6 figure retirement income.

Ultimately, that means I care about dividend reinvestment using cash cows, because it guarantees an unencumbered PPOR and a passive income for life even with zero growth.

I have been way ahead of the curve on this, well before anyone else on the forums . I was in fact ridiculed for my views when I first started posting them... Here we are several years later and this new thread we are on right now is only replicating /copying /complimenting what I was saying 3 and 4 years ago and have been saying almost daily, since..... Every concept mentioned. debt reduction. P&I hedging. Improved borrowing capacity. Ive been saying them for years. I was even talkiung about "bullet proof" years back.... Just look at my username signature. PAY OFF YOUR PPOR . IMPROVE HOLDING POWER. GET MORTGAGE FREE Perhaps I should be paid a cut of the upfront and loan trail these threads generate for @Redom #aheadofthecurvesincebeforeAPRA ... and everyone else.

My weapon of choice has been NRAS and dual occ as the CF+ vehicle - because they work..off the shelf. For anyone. anywhere. under any circumstances. It's just that simple. Being Irish or Iranian or Israeli makes no difference. Understanding servicing calcs back to front and being right about the role credit plays , and building a strategy that caters for the changed role a changed credit environment plays - that is what makes the difference.

This doesn't really affect you @sash. You have a mature portfolio built of 16,17,18 years -pre APRA. And your rents arent 3% or 4%. But it does affect less mature investors who don't have pre APRA calcs or IO for 10 ,15,20 years at their disposal. They need cash cows and debt reduction where you didnt.

The readers of the forum can go on and on and on and on and on and on and on trying to find a magic potion, trying to circumvent the new credit era, trying to replicate the successes of the pre APRA generation, and they will only find themselves back here at some point down the road discovering that they cant get far that way. dividend reinvestment is the key.

Orange and Bathurst Dual Occ's have been a fantastic success story for my clients. Im really pleased - and Im sure they are as well... Even today I'm still selling dual occ's in both locations at 40-50K below what the banks are re-valuing them at after construction is finished.

So people dont need to be green with envy at the successes my clients are having. They just need to say hi and....

 

take a drive to both towns. You'll see a lot of new construction ( 200 homes were built last year for example) which would make you think lots of investors are piling in - yet vacancy rates have plunged to below 1.5% and rents have surged by nearly @7% in a year . So its definitely being driven by tree changers and young families and affordability.

Perth will be the same ...just watch. People getting in now will see strong results in the next 3,4,5 years