[Investment Strategy] What is your limiting resource in property investing?
Have you ever wondered how some investors are just able to keep growing their portfolio? Most Australians never go beyond 1 Investment Property – so what is the trick?
The concept is very simple – to buy a property you’ll need two resources:
1. Serviceability – in order to secure a mortgage from bank
Serviceability is determined by your income. The higher the income, banks will then be willing to lend you more money.
2. Cash/Equity to fund the remainder of deposit and other costs such as legal, stamp duty and so on
Cash is determined by how much your saving is, and how quickly you can save.
Equity is determined by your existing properties and how much price growth the property has in comparison to the existing loan. The more price growth the more equity you have.
For each and every one of us, we’ll always have a resource that restricts you from growing further. For some people this could be cash/equity, where they have a spending habit to keep a good lifestyle so they will struggle to save enough to fund a deposit. Without cash to fund deposit and other costs, they cannot continue to build their portfolio.
On the contrary, some people may be on a part time job so does not have a very high salary – so banks is only willing to lend up to a certain amount. Once that amount is reached, they will hit the “serviceability wall” and cannot advance further no matter how much cash/equity they have on hand.
Be able to identify, and address the limiting resource is crucial for every investor to be able to continue grow your portfolio.
So now you’ve identified your limiting resource, how can you overcome your constraint?
This is the difficult part. But let’s tackle each constraint at a conceptual level.
If your limiting resource is serviceability, then the key here is to improve your income to be able to convince the bank you are worthy of borrowing more. This includes but not limited to:
1. Look for a salary raise with your current employer
2. Find a new job with a better pay
3. Develop another recurring, passive income stream such as shares
As you can see none of the above options are easy – but not impossible to improve serviceability option should that be your constraint.
To overcome serviceability constraint during property purchase, you should look for properties with good rental yield – that way the rental income will help boost your serviceability.
On the other hand, if your limiting resource is cash/equity, then the key here is to improve your cash position. This includes but not limited to:
1. Review spending habits and cut down unnecessary spending. The cliche of cutting down coffee each week definitely helps!
2. Get a second job such as Uber, doing after hours shifts etc to increase the extra cash you’re getting
3. Save, save and save more!
4. Buy property below market value or do cosmetic reno so you can do equity pull to fund as deposit for the next IP purchase
To overcome cash/equity constraint during property purchase, you should look for properties that you can purchase below market value AND with potential to add value so you can manually manufacture equity for the next purchase.
Most investors who has a decent portfolio would have made some level of sacrifices. Whether that’s sacrificing current lifestyle for delayed gratification, less overseas trips, cutting back on coffee etc etc…there’s always a price to pay to be successful. In this scenario the habits is the difficult part to change but again it’s not impossible. If your focus on being successful in property is really strong then you will change, bit by bit, with the spending habits and starting to save more.
Also don’t underestimate point 4 – buying below market value. Assuming serviceability is not an issue then you’ll always need cash/equity to fund the next purchase. Imagine if you buy well below market then there will be a potential for you to be able to pull equity out straight after a property settles and then use that equity towards funding the purchase cost of next investment property! Together with savings, this is how savvy investors are able to keep growing their portfolio – buy below market value, add value, extract equity, rinse and repeat.
What is your limiting resource? Contact us today so we can help you identify and work out a way to overcome them!