I don’t care about property!

Expert Advice provided by Multifocus
03/02/2015

 

Most investors are very keen to find a property that they emotionally like and quite a few look at designs and features that they would like to see in their own home:  “I like the property but I would like the walls painted light blue”.  I usually start any conversation with an new investor by explaining that it does not matter. What the investor likes is different from what a tenant will like. The first tenant might like pink walls, whilst the second one will like cream walls. At the end it is best to keep to neutral colours, because this is not about property.
 
Investing in property is about creating wealth using property as a tool to achieve a financial goal. It is not about owning real estate, having nice tenants and friendly property managers. It is about making money. I don’t know any of 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 is a passive investment for busy people. I only want to hear from my property managers once every 6 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 buying shares, most investors do some research about the quality of the stock they intend to buy, and ideally they should be using an experienced broker. When they don’t, it usually spells disaster. Buying shares without understanding the intricacies – and the traps - of the share market usually ends in tears.
 
This is why when I discuss investing in property with a client I talk about property only at the very end of our conversation. It is really all about the particular financial situation of the investor, especially in relation to debt, the limits of what they can and cannot do. Investing in property needs to fit comfortably within the investor’s financial capabilities taking into account his/her aspirations and attitude to risk.
 
The conversation always starts by working out the boundaries of a strategy, ie how much can you borrow, what kind of funds are available to complete a purchase and this dictates the potential scale of the strategy.
 
In relation to 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 buy a 2 bedroom quality inner city apartment in Sydney of 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. Obviously we also discuss longer terms objectives on how to increase this borrowing capacity, which can be achieved by getting a higher paid job or an increase in salary but can also happen by refinancing existing debt to a cheaper lender or even reducing credit card limits. There is plenty more to discus on that subject!
 
In relation to funds to complete a transaction, this is bank jargon for how much money the investor has to contribute to the property. In other words, it consist of the deposit, stamp duty, etc..This 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.
 
Banks will look at servicing and capacity to fund a purchase independently. 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 is time to talk about a strategy going forward, and only then would we finally start talking about specific properties.
 
In conclusion, there is a lot of preparatory work to be done before we can get into the property subject itself, but I hope I have demonstrated how important this is and that an investor should always go through this exercise, ideally with some good advisor/mentor before jumping into an investment property acquisition programme.

Philippe Brach is CEO of Multifocus Properties and Finance






Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.

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