The Importance of Leverage In Property Investment

Making your property work for itself is no mean task but prudent planning can help you achieve the goal. Michael Yardney from Property Update talks about the number of properties one needs in the kitty to retire safely. Additionally, he throws light on Loan to Value Ratio, the importance of the right kind of property portfolio, and the need for negatively geared properties, among other things.

Location is paramount

In Yardney’s opinion, a single strategically located property exhibiting capital growth is equal to 50 properties in a Doldrums region.

Strong asset base

Every investor dreams of making to the point where he can stop exerting himself personally and spend his days with his property earnings. Yardney believes that there is no substitute to a “substantial asset base” for pursuing this dream.

Loan to Value Ratio

Investing in high growth properties and bringing down the Loan to Value Ratio (LVR) are two definite winners.

Rent can never build your cash machine

On the other hand, it is imprudent to hope that rental income will create a cash machine for you because that way, you will need a very high number of positively geared properties to earn a moderately decent income.

How to reduce LVR?

LVR is a crucial cog of the property wheel. You can reduce it by putting your foot off the purchase pedal, paying mortgage debts with vigour (you may use your superannuation money for the task), selling a few properties and enhancing capital growth through strategic renovations.

When does a bank love an investor?

The best place as an investor is to be in a ‘middling’ zone. You should neither have mounting mortgage debts on your head nor a flurry of positively geared properties. Banks love investors who have moderate debts, fair degree of liquidity and a self-funded portfolio.

On seeing reduced LVR, apart from the above features of your property portfolio, banks do not hesitate in forwarding a loan to you.

You can use this loan amount for meeting your expenses while the leverage and capital growth on your portfolio builds your asset base and subsequently your cash machine.

How can this end be achieved?

To achieve all this, as you would understand, you will need to buy properties in the right areas. Property locations should ideally exhibit diverse growth factors or multiple-industry economy.

As an aside, the location should also manifest scarcity so that it remains in demand among the owner-occupiers.

It always helps if a property location shows signs of historic property growth and lies on the upward curve of the real estate cycle.

You can read the original article here.

Portfolio should be well-spread

In my opinion, Yardney hits the nail near perfectly. I will just like to add another imperative- diversity of property portfolio. It is important to buy properties in many different areas. This way, even if some of your properties are hit by a real estate trough, there will be others which may be riding a crest.

On the other hand, even if you have a dozen golden properties in the same area, an industry reversal (refer to the mining boom), a natural calamity (beach washed away) or repercussions of a government initiative can turn your portfolio to dust.

Do you seek diversity of location in your portfolio? If you wish to diversify your property portfolio in Sydney’s Eastern suburbs, why not give me a call?