Investment tip: Controlling your capacity to pay

Todd had the advantage of having the good influence from his parents—who, according to him, have a "property fetish"—when he started his property investment journey at 19 years old.

However, like most first-time buyers, he went to purchase his first property by instincts instead of by research and professional consultations.

"My parents owned [a] motorcycle shop, a retail motorcycle shop and that business was purely there to fund their property fetish, really. They made lots of good money out of property. The instilled those qualities into us three kids. Me more so than probably my brother and sister. They taught us about money. Mum's very good with numbers," he shared. 

"I bought my first place when I was 19. It was just a one-bedroom unit in Cronulla. I bought it as a home. I had already saved up by then a 20 per cent deposit and the stamp duties.

"There was no such thing as the first home owners grant or zero stamp duty back then. It was purely,... 'It was nice, it was near the water, it was near Cronulla Mall...' There was no research, no data, [just] ‘Yep, this is nice. Yep, I can afford this.’"

From the very beginning, Todd had the importance of cash flow instilled in him by his parents, who are running a successful business at the same time that they were growing a property portfolio.

Property investor Andy Scott believes that cash flow should be a massive consideration for property investors as it can dictate the flow of one's investment journey.

According to him: "Cash flow is a massive... thing for all property investors—the ability to hold debt or hold property and have the capacity to pay that, however you generate that money, whether you’re a self-employed business person, or you get a PAYG [pay as you go]."

As an adviser to property investors, Todd always makes sure to remind his clients about this fundamental lesson in property investment. After all, understanding cash flow might just be the best foundation for starting a business of creating wealth through property.

"I've got some clients that are very good savers and who understand all those philosophies very well. There are a lot of people now that... have a mortgage broker for their finances and now they have a buyer’s agent to help them with their property," Todd said.

"It's not a bad thing if you’re using the right services. I think that if we don't understand it we just farm it out to somebody else. There's a lot of that that goes on in relation to the cash flow side of things."

Property investors can control their capacity to pay even in the midst of ever-changing rates in property markets by the way that they look at their serviceability, according to Smart Property Investment's Phil Tarrant.

"I do all of my numbers for my own portfolio at nine per cent. If I can't afford my portfolio at nine per cent, then I don't buy the next property... I say that to clients, 'You should be looking at this at nine per cent, not at six or six and [a] half,'" Phil explained. 

:Six and a half is the average interest rate that we've had over a long-term period. Is it going to get back there? Well, what's the average? Say ‘yes’ is the answer to that and [it could] probably go beyond at some stage. We haven't seen anything pass eight and three quarters to nine per cent for a very long time. I think I'm fairly well safe guarded by that aspect, by sitting at nine per cent.

"Cash flow is a definite big thing that you should be looking at. It's a big investment. You need to protect yourself. Going financially bankrupt or crippled is not something that you definitely want to go down that path at all," he concluded.

Tune in to Todd Hunter's episode in The Smart Property Investment Show to know more about whether investors are in trouble if they're relying on yield and what inevitable rate rises mean for property investors.