June 2016 - Quality vs Quantity in Building a Portfolio

By Rich Harvey, Managing Director propertybuyer

How many properties do you need in your portfolio is often a vexing question. Do you go for growth or yield? We all want both - but is this possible? This month we examine the key steps required to build a quality portfolio and give some great tips for how home buyers can trade up. We also look at how lending policies have changed for overseas buyers and smart options to get finance, and we welcome our new Buyers' Agent covering Development and Commercial acquisitions.

This June update includes:

1. Quality vs quantity in building a portfolio
2. Important changes in mortgage lending for non-residents of Australia
3. Introducing Dean Galanos, Buyers' Agent

1. Quality vs quantity in building a portfolio

Here's the bottom line: You'll need more than one investment property to create wealth and retire comfortably.

In today's fast moving world with instant communications, SMS, fast food and 2 minute noodles, many budding property investors are being lured with the promise of "get rich quick" schemes that promise investors they can make "instant equity" and become a millionaire in less than 5 years. It seems that Generation 'Y's (Millennials) are particularly at risk as they are the instant gratification generation.

Gen Y's are typically more tech savvy and expect everything to be delivered faster. Gen X's and baby boomers are equally at risk as they may think they have to "rush" their investments to catch up. While pizza delivery can now be tracked to within 60 seconds, property investors of all generations need to appreciate that capital growth can take decades over the course of a property cycle.

The psychology of some investors is similar to a poker machine - put in a little bit of money, pull the lever and hope for the best. Smart investors know the odds of poker machines are stacked against the user. Expecting any investment strategy to quickly turn you into a millionaire within a year is simply unrealistic.

If you have a goal of $150k passive income you're going to need at least $3m in net assets ($3m divide 5% average yield = $3m). So you could buy one investment property at $3m but it is highly unlikely to rent at 5% return. Or you could buy 6 x $500k properties to achieve the same goal, which is a much safer and effective way.

So how can you set about building a solid property portfolio of quality properties?

There's a number of simple steps you can take to get on your way sooner.

1. Assess your current financial situation and set some realistic goals
2. Speak to a mortgage broker and get an estimate of your borrowing capacity
3. Pick a property strategy that works for your situation
4. Research and decide where to buy

Search for good quality properties and select one.

While I have over-simplified some the above steps, note that property selection comes at the end of the process. There's no point jumping on the internet searching property portals if you don't have a clear strategy and refined search criteria.

In deciding which property investment strategy to pursue, consider the end point - are you going to hold the property long term, or is it a trade-able property to sell in the short to medium term?

I have unfortunately seen some naïve property investors lured by property spruikers to attend a property seminar and then buy the first property they were offered without doing adequate due diligence.

One strategy home buyers can use is the "trade-up strategy". This simply means getting onto the first rung of the property ladder - say a one bed unit. Over time you pay down the mortgage and build up equity to trade up to a two bed unit in a better suburb. Several years later you may be able to afford a townhouse or duplex...then perhaps a house. I recommend using some of your home equity as a deposit for leveraging into other investment properties. If you wait to pay off the home loan first, before committing to property investing, you might miss out on three decades of growth.

Rich's Tips to Build a Sustainable Portfolio:

• Set clear objectives and stay accountable.
• Diversify into different markets/ states/ suburbs to take advantage of changing growth cycles/ infrastructure/ changing demographic.
• Monitor performance annually...but be patient for growth - don't expect instant capital growth. You need to hold the asset for at least 10 years to really see the benefits of capital growth compounding.
• Get rid of dud properties in mining areas or lackluster suburbs with no long term potential.
• Focus on buying quality properties that you don't need to sell.
• Refinance, draw equity and reinvest - recycle your equity.
• Don't try and buy too many too fast - get advice on what and where to buy.
• Manage your debt levels carefully.

At the end of the day it's not the number of properties that you own, but the overall value and quality of properties in their portfolio that counts.

If you would like help trading up your home or growing your property portfolio then please call my friendly team of buyers agents on 1300 655 615 today or email your wishlist to discuss your requirements.

Rich Harvey is founder and Managing Director of www.propertybuyer.com.au, Australia's most awarded Buyers' Advocates.  Propertybuyer helps property investors and home buyers search and negotiate the right property at the right price, every time. Visit www.propertybuyer.com.au or call 1300 655 615.  

2. Important changes in mortgage lending for non-residents of Australia

On 29th March ANZ Bank in Australia was the first major bank to announce they will not accept foreign-currency income when assessing loan applications for property in Australia. Since that date all major banks have issued changed-policies to either exclude non-residents and citizens abroad, or dramatically reduce the amount of lending available.

There is no indication of when or how policies of Australian major lenders might return to their previous state. Smaller lenders typically do not lend to overseas residents.

Both foreign nationals and Australian citizens living abroad are affected.

Why did the banks make these changes?

It's fair to say the reasons behind such changes are a mixture of a changed risk assessment by banks towards lending based on foreign-source income, and political or government influence designed to impact the speed of growth of the housing market and the ultimate level of foreign ownership of Australian property.

This changed risk assessment can be linked at least in part to a current concern about possible mortgage fraud when foreign incomes are overstated.

The current bank changes indicate perhaps an anticipation by banks of increased scrutiny by regulators and so these changes may help them prove they are actively reducing such perceived lending risks.

What is the impact for YOU and what are your present options?

If you live outside Australia and are considering a mortgage to buy property in Australia, the likelihood of a loan decline from the first bank or broker you approach, is much increased.

Several credit enquiries and declined loan applications reflect unfavourably on your credit record, so you need to carefully manage your application process.

Your options are much more limited than before, however there may still be an option available for your particular situation. Sometimes the choice of lender and success of any strategy is directly related to the relationship your mortgage adviser has with the lender that is ultimately right for you.

Today more than ever there is no substitute for professional help and advice. Your adviser must have the experience, contacts and capacity to access and analyse bank policies across a very wide range of lenders both local to Australia and globally.

This is the only way you can hope to discover and approach the most appropriate lender for your specific situation, first time.

Daniel Shillito is an Australian licensed mortgage broker and financial adviser specialising in foreign resident mortgage applications and financial relocation assistance. http://aussiefpgroup.com/.Contact Daniel at daniel@aussiefpgroup.com

3. Introducing Dean Galanos, Buyers' Agent - Development & Commercial

We are pleased to advise that we have just appointed Dean Galanos to assist our clients looking for Development sites and Commercial assets.

Dean has over 20 years' experience in the commercial property sector spanning Property Funds Management, Development, Valuation, Leasing and Sales. He is an experienced Capital Transactions and Development professional, having specialised in the "Value Add" sub-sector of the property industry for the last 14 years.

Dean has wide-ranging experience working in both institutional and private environments. Since 2001, Dean has worked as an integral member of teams that have collectively been responsible for the acquisition and delivery of capital transactions (in Australia and New Zealand) with a gross asset value exceeding AUS$1.0 billion. He has also participated and assisted in the raising and managing of over $500 million of wholesale equity during that time.

Dean's property acquisition and execution experience canvasses the broadest extent of the property risk spectrum and includes management and delivery of a number of successful value-add projects including industrial, commercial, bulky goods retail properties and land subdivisions. He is an Associate of the Australian Property Institute, Certified Practising Valuer and Licensed real estate buyers' agent.

We welcome Dean to the Propertybuyer team and his expertise complements our other buyers agents servicing residential homes and investment properties. Please contact us if you are seeking assistance with development or commercial acquisitions.