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Size & income matters

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Transcript

Thank you everyone for joining another episode of The Board. Today’s episode is all about me going back in time to figure out why I wanted to take this path, building a large property portfolio and being able to continue to build it and continue to grow it and have that income come from it for me to supplement my expenses or my way of living. Now I actually really want to share today’s episode based on what I learned back then and what made me take the road and the journey I’m on today. So, what today’s episode is all about is how size and income really matters when put together. I took time before jumping into property to really study some of the wealthiest people in the property industry. People who had created significant portfolios and there were some things that were really common. One is who had a large portfolio and two who had the income to keep this portfolio and sustain it over both good economic periods and those that were difficult. 

So difficult can mean so many things, it could mean interest rates rising, it could mean certain economies and certain things changing in terms of the workforce diversity or jobs or markets. But the truth is, this was one similar thing, large portfolios with incomes to sustain both good and bad periods. In the good sustaining, it was looking like having an income to live off or having an income to reduce debt quickly. In the bad periods, it was not losing as much as others would and being able to hold your portfolio for longer. Okay? So these are the common trends I realized. 

So when I went deeper into it I found out some more things. I go okay what was the other thing in common, income, growth. Now not to mean just your portfolio, I’m talking about income growth in the sense of outside of what you do to build that portfolio. Whether it’s as a business owner or in a salary. I didn’t notice very many people having that low to medium income being able to build it for a long period of time. So the ones who were being able to build it were not the ones looking back and going, oh well how am I supposed to do that I’m on $50,000 or $60,000 or even $100,000. They were people going, I understand income needs to grow. I understand building a large portfolio is what can really help me go the next step. 

The next part is I needed an income strength from this portfolio along side capital growth so I could have myself sustained through both good periods and bad periods. So I’m not having to force sell when things don’t go so well. So when we look at this, although there are so many more factors to look at behind these two examples, I just want to give it to you in a very generic sense. Now, from this left side we’re looking at someone that may have purchased one to two properties. These one to two properties in the current term are losing money every single month. Now if we look at past indicators, past indicators would show that it’s okay that it’s losing money because A you may be getting some it back in tax and B some values in Australia have grown quite well and then over time as rents increase and values increase and the tax returns cover you, you’re going to be okay. But we all know something, past indicators are not what’s going to be or demonstrate what future success looks like. 

So I took a different path, I took the path of I want investments that earn me an income, whether it’s on interest only or principle and interest and being able to have that income supplemented with the same drivers of growth so I can look at a property that gives me income growth as a plus but still do all the searching for those things that measure signs of growth and applying that filter to it. So I’m having a portfolio where some properties are growing more than the other and some properties are increasing my income more than the other. Together you put them together and it equals that larger portfolio. So in terms of which strategy is better, this is not what this video is about. This video is talking about how when you amass a large portfolio and you have the income to sustain it or grow further, it outweighs any type of quality property that you bought hoping to lose money and gain on it later. 

Let’s look at this. Let’s assume you bought one to two properties. You’re going into the bank, you’ve got an 80% loan of this $1.5 million dollar portfolio. Now, your goal from this whole discussion is to go, I want to gain another $400,000 in wealth or equity. So when you’re looking at this, you’re now relying on 26.66% of growth to get this shift in equity for yourself. Part two is to go, alright, lets have a look at a $4 million dollar portfolio. Now you might be saying Arjun well those are massive differences. Well if we think about some fundamentals, if you are buying a property say that $1.5 mil, maybe one to two properties and then losing money, there’s a high chance that the bank won’t be able to give you as much in loans. Now in this scenario, I was finding myself being able to A build a property portfolio but because I was getting properties that were rented higher, even though they might have certain caps for examples, some banks cap at a 6% yield, some banks only take in 80% of your rental income. Regardless though, the fact that you’re getting to those levels compared to the two or three percent or three and a half percent marks here, you’re actually able to naturally borrow more. 

So as time went on, yes as incomes require more and incomes increase, if your focusing on these things are building a large portfolio through having a balance of properties that can grow as well as balance of properties that have some high incomes and let’s just say you build yourself towards a $4 million dollar portfolio. You only need 10% of growth to get the same $400,000 result. So what it’s trying to show is that A if you’re focusing on a portfolio where income matters, you are able to come back to the bank and borrow some more. Now does that mean this example is saying that if had only six to seven percent yields you’d definitely get $2 million dollars more? No. There are other situations that can occur in your personal life but the point is the fundamentals of two things. As your income increases both personally and from property and as you build a larger portfolio, you’re relying on less growth to get the same $400,000 outcome. 

So as my portfolio builds and as these other customers that we’re supporting [investicate 00:06:33] as well as those people who I’ve looked up to, build their portfolio through compound growth or through acquiring more assets, it means that they’re relying on less growth each time to build that same amount of wealth. Because they’ve generated or have properties in there that are generating income, when it comes to these catastrophic periods that may or may not occur and they can occur through different cycles in properties, they are able to withstand it better than another customer who might be losing money in most cases. 

Now you can factor that over the argument of wait but what if we increase rents and what if I’m getting tax back. These are other conservations but again, cannot be guaranteed that they always happen. Tax policies can change, rental market performances can change so these are the things that we need to not consistently rely on. What we are relying on here is that we’ve bought a mix of assets that are prone for growth or look like they could grow. Again, it’s a plus. But at the same time we’re buying assets that produce income and through building a larger portfolio we are relying on this growth. As you know, the main thing, growth is not guaranteed. 

So that’s why I wanted to share with you size and income matters in property portfolios and in building a property portfolio. As it grows, you rely on less and ask some of the most successful people who have built their wealth, two things are common. They made it large and when there a large portfolio they needed less reliance to grow it and the second this is that they had income in this portfolio to sustain them between good and bad periods. It may take residential properties, it may take a mixture of commercial but having these two are very important. 

That’s it from us here at Investor Kit the experts in loss creation, helping you take action.