By Philippe Brach, CEO, Multifocus Properties & Finance
Most investors are very keen to find a property that they like personally, and quite a few look at designs and features that they either have or would like in their own home. For example “I like the property but would prefer the walls painted a different colour” or “The benchtops/kitchen cupboards aren’t the type I would choose”.
I usually start any conversation with a new investor by explaining that these preferences really don’t matter. What an investor likes can be very different from what a tenant might choose. Your first tenant may like coloured walls, whilst the second one prefers them painted cream. Everyone will have a different personal choice but, at the end of the day, as an investor it is always best to opt for neutral colours which will enhance the overall appearance of the investment without making bold statements which may put off some renters.
Investors should keep in mind that this is not about property, it’s about making a good financial investment that will bring rewards over the long term.
Investing in property is about creating wealth by using property as a tool to achieve a financial goal. It is not about owning real estate, buying a property the investor likes or having nice tenants and friendly property managers. It is about making money. In my case, I don’t have an interest in the names of my tenants, I rarely visit any of my properties, and property managers handle all of the management aspects of the assets. For all intents and purposes investing in property should be a passive investment for busy people. I only want to hear from my property managers once every 6 or 12 months when rent is due for renewal. I then take the opportunity to have a good chat about the local property market and keep a finger on the pulse of this particular location.
When I discuss investing in property with a client, I only talk about property at the very end of our conversation as it is really all about the particular financial situation of the investor, especially in relation to debt and the limits of what they can and cannot do. Property investment needs to fit safely within the client’s financial capabilities, taking into account his/her aspirations and attitude to risk.
So the start point is to discuss the 3 requirements all lenders want a borrower to satisfy before they consider giving a loan. These requirements in effect define the “boundaries” of what an investor can or cannot do.
1. Borrowing capacity
There is no point planning to create a portfolio of say 10 properties if the investor’s borrowing capacity is $300,000. Similarly, planning to purchase a 2 bedroom quality inner city apartment in Sydney is out of the question. So knowing the investor’s borrowing capacity is a key piece of information that defines how many properties he/she can buy, and also has an influence on the investment location. We also delve into longer term objectives regarding how to increase borrowing capacity, which can be achieved in several ways. There’s plenty more to discuss on that subject to help investors continue to build their portfolios.
2. Funds to Complete
This is bank jargon for how much money the investor has to contribute to the property purchase. In other words, it consists of the deposit, stamp duty, etc. and can come from savings or by releasing equity in an existing property. Obviously, the more equity/savings, the more properties an investor can potentially buy.
3. Acceptable Security
Banks want to make sure that, in the event of a default by the borrower, they can sell the property reasonably fast and at the right price to cover the loan. The more mainstream the security, the better. Lenders often don’t like specialised real estate such as student accommodation, serviced apartments, small units, high rise buildings.
So, a lender will only give a loan when all three elements described above have received a green tick. In other words, an investor can have $300K in savings/equity, but if he/she hasn’t got enough borrowing capacity the bank will not grant a loan. Conversely if someone has a huge servicing capacity but no deposit/equity, the same applies. Obviously the security needs to be adequate otherwise it’s a no-go again.
Therefore, most investors will hit a wall with the banks at some stage. Either they will run out of cash/equity despite having plenty of borrowing capacity or vice-versa.
Once we have defined and discussed these limits, it’s time to talk about forming a strategy going forward, and only then do we finally start looking at and discussing specific properties.
In conclusion, there is a lot of preparatory work to be done before getting to the part of selecting a suitable property and I hope I’ve demonstrated how important it is to follow a proven process. An investor should always go through this exercise step-by-step, ideally with some good advisor/mentor before jumping into an investment property acquisition programme.