Thinking big: Is it possible for me to own six or more properties?

Adding to your property portfolio will help to maximise the rewards of compound interest, writes OpenCorp’s Michael Beresford.

 

Buying your first investment property is a daunting prospect. After all, we’re not talking about a small amount of money. This is why at OpenCorp we demystify the process for our clients; we give you the framework for success and help you understand what risks exist – and your tolerance for them.

Several of our customers, once they’ve acquired that first property, realise it’s a sound investment and want to amass multiple properties.

But what about six or more? Is that biting off more than you can chew? I’m going to explain why it’s less scary than you might think.

There’s nothing wrong with thinking big and having ambitious goals. We always say, shoot for the stars and if you get the moon, it’s still a pretty good outcome. Whether you end up with six, five or four properties, it’s a better outcome than a more passive approach where you think you’ll be happy with just one or two.

You need patience, and the discipline to do whatever you can to improve your borrowing capacity. Maybe eat out less – whatever it might be to put a bit more money in your pocket.

You don’t have to sacrifice your lifestyle, but small, frequent steps will be more successful than a few, occasional large strides.

Four per cent of our client base have four or more properties, and they’re focused and ambitious people by nature. They’re the ones who are always asking us, “What should we do next?” They are continually exploring ways to improve.

Tweaking & improving

I use Roger Federer, as an example, or Novak Djokovic. They may be number one in the world for a record number of weeks, but they always talk about tweaking and improving to get better. Wealth creation is no different.

For the past four years we’ve been in a very tough lending regulatory environment, and that makes owning six investment properties a challenge. But that’s part of the conversation – and there has been some recent relaxation of the responsible lending laws to free up credit.

We need to be realistic; Rome wasn’t built in a day. You don’t wake up one morning and decide to run a marathon that afternoon with no training. Anything that’s going to deliver a substantial result is a process requiring consistent actions, focus and some discipline over an extended period.

But six properties is absolutely possible.

There are a few fundamental factors to be aware of, and the first is to understand what you’re buying, and make sure it is a capital growth focus property that’s effective from a cashflow perspective.

We hear a lot of talk in the property investment world that you can either have a capital growth-focused property, or a cashflow-positive property.

We don’t subscribe to the notion you need to sacrifice one for the other. We believe the focus needs to be on capital and compound growth for wealth creation, but you can have properties that are optimal from a cashflow perspective.

Tax benefits

If you buy a capital growth-focused property that is expensive to hold, you’re not going to be able to get six of those because you’re just not going to have the cashflow to support the shortfall between the rent and tax benefits.

Likewise, a cashflow-positive type property (let’s say in a regional area) might be bringing in $5,000 to $7,000 of positive cash flow each year, but if it’s not growing in value, then you can’t harness the equity to add the next property to your portfolio.

The second fundamental is doing whatever is possible to improve your borrowing capacity.

That could be reviewing your living expenses, refinancing existing debt for better interest rates, or being disciplined about putting your rent up. Let me share an anecdote that makes this point.

A couple of days ago one of our property management team was telling me that the rent for one of our clients could have gone up $60 a week to match the market, but the owner was loath to because they had good tenants.

So why not put the rent up $40 a week? The tenants are still getting a better deal than the market, but you’ve improved cash flow by more than $2,000 a year. Be smart about how you treat the tenants and the rent you set, but at the same time understand maximising cashflow will also maximise the number of properties you can hold in your portfolio.

Don’t get complacent and think, just because property is a long-term investment, you can let it go for a few years. When you have the borrowing capacity to add to your portfolio, you must take advantage of the power of compound growth, and think big.

  • OpenCorp’s property specialists understand the process required to give you the best chance of achieving your financial goals – visit opencorp.com.au