Solving the borrowing capacity dilemma

Seeking views from mortgage brokers and experienced investors.

From what I understand building a sizeable property portfolio heavily relies on the ability to leverage.

The ability to leverage heavily relies on equity (deposit) and serviceability (repayments).

I intend to be aggressive in my financing approach in order to achieve my goals as early as possible.

My strategy includes maximising the size of the portfolio as quickly as possible. To do this I want to plan ahead and avoid the reaching the point where bank says no your maxed out.

I have ways in which I could vary the levers to adjust. I am therefore trying to determine where to focus my efforts to maximise borrowing capacity. My property strategy is more of a financing strategy as the way to build wealth. I don’t care about the properties I care about the borrowing capacity for maximum leverage in a vehicle which over time should increase in value.

My question is, which one of the two (equity or serviceability) or something else? is the bigger hurdle in people’s experience.

I understand it will depend on individual circumstances so have included some of my details below but also trying to get a feel what impacts the masses most (so I can adjust as best I can). I’ve included a poll to share so insights can be gleaned quickly by all.

1 property $1.1M
Loan $0.3M
Equity $0.8M
Current net surplus income a month $6K.

 

From my perspective as a broker - a lack of equity used to be the biggest hurdle for those growing a portfolio.

These days - it’s servicing that’s the limiting factor.

Everyone’s circumstances are different though.

Cheers

Jamie

 

Great. Thank you Jamie.

 

You should care about the properties. No use leveraging into duds.

For most people, its their serviceability which slows them down, especially once you've built up a decent amount of equity.

 

Thanks Sackie. Definitely aiming to avoid duds as this will limit my future borrowing capacity. The point is I will aim to buy properties based on the numbers only with the aim of not maxing out.

 

Sounds like a plan. Just be sure not to ignore the qualitative feedback from people on the ground. I have heard many people say its all about the numbers. Imo, yes and no. Numbers can be misleading. Sometimes very misleading. Its a combination of quali/quantitative data which gives the most accurate picture imo.

 

Thanks. Useful insight. When you talk about qualitative data are you referring to owner occupier appeal? Can you elaborate on this?

 

Buying during the gfc, or even recently around 2018 in syd/ melb. What numbers made it good buys? Did perth look any worse than syd melb? Why the difference in returns?

 

You have some unique circumstances you need to understand. Your serviceability looks very high (assuming the parents mortgage is not in your name) but your actual spare cash is lower than on paper. That means your borrowing capacity might be higher than what you can actually afford.

in your case the buffer is more important.

you need to decide what you want to buy. Otp units looks great on the numbers too. There has to be some specific city or area analysis.

you cant just expect 7-10% growth. Fact is 10 years is a short timeframe. Sydney 1999 to 2009 and 2009 to 2019 were very different decades.

The danger is that the plan to invest aggressively so that you can achieve x in 10 years leads you to stuff that is advertised with high returns such as land, development etc. Which can work but only if you have the experience to assess.

 

Geez Trainee. Haven’t had my morning coffee so took a second for the brain to switch gears. I think I see where your going.

Market sentiment, supply and demand (current and future), People’s emotions, the media?

In my research I’ve been looking at the historical performance of a property as well as the fundamentals of the area.

 

Appreciate the considered repose Trainee. I’ve never been one to do things by half.

Fallen flat on my face twice but I always get back up and running. Always.

I’ve learned a lot from my mistakes. They’ve been painful but lessons I needed (and deserved)

I’m going maximum leverage (again) but blue chip. Happy to sacrifice some yield initially.

One day after the failures, success will come.

 

This will differ for everyone but I like to include:

- Subrub demographic make up
- proportion of OO/renters/ mortgage holders
- local amenities, current and approved
- dwelling type prevalence, units/houses/ THs etc. ( Very important )
- price disparity gaps to neighbouring Subrubs ( very important)
- any unique factors for the area/streets
- discuss with real estate agents on the ground local market sentiment
- discuss with other investors investing in your chosen area their feedback on the area
- local population and growth
- and what strategies seem to be most suited to the area chosen. Many people have a fixed strategy in mind and then try to apply it to any area. I prefer to assess the area, then see what approach/es would be best for the area and financial returns.

 

In the very early days it will be equity that slows you down, but over time it will become income. Lives slowly decrease because of growth and pi payments but you will hot a point where you won't be able to borrow against that equity. So plan ahead a bit with redraw and offset accounts, debt recycling and related party loans and you will get further

 

Some real gems here. Appreciated. The demographic (in particular income of people in the area) I think is a top 3 factor for me. As I understand more about the finance, people with lower incomes will only be able to borrow so much limiting the potential capital growth of an area unless demographics of the area change over time.

 

Getting a mortgage broker who will work with you is the key.

I have found a lot not all are just interested in doing a transaction...there was one broker who shall remain nameless who I referred to a friend and they stuffed it up. My friend was furious...that they refinanced within a couple of months.

Make sure you understand the pros and cons of the loans...ask a lot of questions. Some of the brokers are very inexperience and simply put people into majors like the CBA ...which I in think in my opinion have one of the worst track records for rates down the track.

There are some individual who are just transaction focused...avoid these guys like the plague! Note that is is some brokers not all.....

Oh...also avoid the brokers who are big noting themselves on face book pages...you know the ones who under a guise are kind of setting a legitimacy of offering a forum for like minded people. It is actually a front for promoting their business. Avoid them at all costs. The best ones are people who are referred by actual investors with large portfolios.

I find a lot of newbie investors gravitate to people who promote themselves...on social media....mags etc. A lot of these guys are only looking for the low hanging fruit!

 

So what type of property, in what suburb, for what price range, would you buy now?

 

This is the type of info I was after. Thank you. So capital will be the initial hurdle and then serviceability over time. Without being over simplistic....

If I had to chose (between capital growth vs yield)

It might be CG, CG, yield, yield, CG, yield. Adjusting as I go along?

I know I can also go for CG and then improve to increase yield but if I had to chose it looks like higher growth potential with lower yields initially and then transitioning to higher yield (due to time) or through higher yield acquisition which may limit CG (e.g townhouse).

 

Don't forget the most important element to all this.

Strategy.

Depending on what strategy/ies you intend to use, everything can change.

 

I’m likely to invest in Melbourne. Option will be house (if I can afford it or townhouse if I can’t) location will be the driving determinant. $1 - $1.3M.

I see real potential that Melbourne prices will close the gap on Sydney over the next decade. I know others will have their views.

I’ve lived in both cities so have a basis of comparison. Both wonderful cities that will do well but Melbourne I think has more room for growth.

 

Yes agree on adaptability. I’m modelling different scenarios so useful to understand where I might hit the borrowing wall. I will certainly will need a good broker in future!! One who understands how to maximise borrowing power.