The ABCD’s of investing
The fundamentals can be summarised in four categories. The ABCD’s of investing are essentially the four pillars that need to be understood and followed to maximise your investment return.
Asset selection
Property is finance mixed with bricks and mortar and what it all comes down to is the type of asset you purchase.
To nail your asset selection you need to first understand your own individual strategy. Whether it be a value add property, new build, Commercial, negatively geared, or positively geared. Where you purchase you property also comes down to your strategy, if you are purchasing for high capital growth and have the suitable income to deal with negative gearing than a property near major growth hubs and cities will be rich for you. If your income is average and your aiming for a costively geared property than you might be purchasing near regional centres where growth potential is still evident but your rental yield will be higher.
In order to maximise your growth returns from your investment property you need to be purchasing where an area is experiencing government spending, Gentricfiation, population growth, wages growth, low inventory levels, more than 5 business sectors and sufficient amount of parks and public amenities (hospitals and schools).
Your asset location will be 80% of the heavy lifting with your capital growth so its extremely important to research from the top to bottom, Where you research the best state, Best area, best street and best investment grade property.
Borrowing power
Borrowing power refers to how much capital or how much you can borrow from your lender. There are certain levers which can be pulled to increase your survivability (borrowing power).
Your borrowing power is the driving force behind your portfolio, where the more funds you can access the bigger asset base you can hold and benefit from. In order to raise your borrowing power you need to increase your income to the highest Level possible because your income and payslips will be the main factor that banks will consider when reviewing your loan application.
When lenders are looking at your application you will need to provide your bank statement to them, therefore all your discretionary spending will be on show to your lender. You need to control your leisure spending and keep it as low as possible because lenders will see you spending lots of your income on discretionary stuff and wont want to lend you money as there might be a chance you wont pay it back on time.
A negatively geared portfolio will also inhibit your borrowing power as the bank will see your short fall in rent over expenses and look at this as a restriction on your ability to pay back future loans. Individuals on high income will be able to deal with this as there income will be high enough to continue borrowing but middle to low income earners will need to keep the portfolio neutrally-postively geared as the rent in your property portfolio will be considered on your application.
Cashflow
Cashflow refers to How much money is left over after repayments and expenses. Your property can be either Negatively geared, neutrally geared or positively geared.
If your property is positively geared than your cashflow is positive at the end of the year after repayments and expenses. Whereas on the negatively geared properties your cashflow will be negative after all repayments and expenses.
Cashflow will allow you to continue acquiring properties so its important to forecast rents and expenses in order to plan for what the of property needs to be next in your portfolio. In the acquisition phase of your property investment journey you need to balance negatively geared properties with positively geared properties to ensure you are able to stay in the property game and not be capped with your serviceability.
Defence
The you purchase investment properties you need to have a exit strategy in mind so you can purchase the right type of properties that will serve you when you decide to covert your portfolio into your desired outcome.
Your defence refers to how you will exit your portfolio and how will your portfolio deal with external stresses, such as interest rate rise or capital growth downturn. When you invest in property you need to have buffers in place to deal with unexpected such as loss in rent or a increase in your loan repayments.
One of the reasons investors fail is they fail to plan how they will deal future rises in repayments are stabilised timeframes of capital growth. If you fail to plan you plan to fail. Your investment property portfolio is your business and you need to defend your business.
Follow the ABCD’s of investing you can ensure you've maximised your chances of achieving wealth through property investing.
Written by
Tom King
Director of Bez Property Buyers
