Investment Tip: What are the numbers you need to track your progress?

For Smart Property Investment’s Phil Tarrant, who has already acquired more than 10 properties, as complicated as administration could get, his reliable financial team always makes sure that he understands all the ins and outs of his investment journey. Aside from buyer’s agents, accountants, and mortgage brokers, he also works with a professional whose focus is to “manage the administration around the portfolio”.

He also utilises some good tools to help him avoid being overwhelmed by new data that comes in regularly.

According to him: “We've got a pretty sophisticated spreadsheet that works for us, which just lists all the different properties in our portfolio.”

“[We also have] a really good summary dashboard that I can look at in any point in time [to] know what's going on—what the cash flow position is of anything, what the rent is, what the equity position is … That works for us, but everyone's different,” the property investor added.

Framing your spreadsheet

Propertyology’s Simon Pressley agrees that, in terms of managing a property portfolio, nearly nothing beats the convenience and flexibility that an Excel spreadsheet gives its users. Through the spreadsheet, one can create his own formula to be able to process different variables depending on the factors that he wants to consider.

The buyer’s agent said: “We're all going to have different things that we want to calculate and keep an eye on … You really can't beat spreadsheets.”

In order to maximise the benefits of this useful tool, a property investor must know how he wants to frame his spreadsheet.

Phil explained: “If there's a number at the bottom, it might be how much is this costing me every single week to hold, and for some people that'll be a key metric about the serviceability of their portfolio.”

“For some people who are tight, that might be the principle number. [For] other people, it might be an equity position.

“[For some], it might be how much equity will [they] have at 90 per cent or 80 per cent should [they] choose to refinance so can [they] keep building and growing?” he added.

The way you build your portfolio will determine which data will be most relevant to your decision-making.

 Simon shares some of the key headline numbers that can help you start building a simple but helpful spreadsheet for the effective management of your property portfolio:

1. Interest rate

According to the buyer’s agent, the interest rate “directly leads” to a property investor’s biggest expense.

“No matter how many properties you've got, interest will always be your biggest expense,” he said.

2. Rental yield

To calculate the rental yield, most investors take the amount of gross rent per week and multiply that by 52 to get the annual gross income figure, and then express that as a percentage of the purchase price to determine your yield. Other property investors calculate yield in different ways, including ‘yield at the time of purchase’, ‘current yield’, among others.

Phil said: “When I calculate our yields, I normally [consider] what we paid for it, plus all the other stuff associated with it, [like] buyer's agent's fee, renovations, stamp duty, [and all of the] legals.”

“I do a yield on a total amount rather than what I paid for the stuff, and a lot of people try and fool themselves thinking they get a better yield, but they don't include all the expenses,” the property investor added.

3. Equity

According to Simon, equity is also another key variable to consider when framing your spreadsheet in order to determine whether the asset is actually growing.

He said: “The most valuable ingredient that all investors have got is time—as soon as you can afford to invest, that's the right time to invest again.”

“The most important question is not when, but where?” the buyer’s agent added.

The equity can help the investor know whether or not he can continue buying properties by drawing down on his current assets. Whether the cash flow is positive or negative can impact this data as well.

Stress tests

Aside from considering the interest rate, yield, and equity, property investors must also make it a point to establish a “stress test” on their portfolio. For example, instead of multiplying your weekly rent by 52 weeks, you might want to consider multiplying it by 48 to accommodate unexpected vacancies.

Simon explained: “For example… if I've got a property that's getting ... $400 a week … I multiply that $400 by 48 [instead of 52 because] I'd be kidding myself if I expect every single year that I'm going to have a tenant paying $400 a week, even if when that property comes out of [a] lease and the vacancy rates might be really low.”

“Similarly, with interest rates, don't kid yourself and put the really cheap interest rate that the bank offered you to get your business right from the outset. Build in a bit of a buffer of at 0.5 per cent … [or] 1.5 per cent,” he added.

Having these buffers can help even the most nervous investor navigate his way through his investment journey.

When framing your spreadsheet, these are some of the questions you might consider asking yourself in order to establish the necessary buffers:

• Where am I going to invest?
• What property am I going to buy?
• What if I don't have a tenant for a month or two?
• What happens if they do increase interest rates by half a percentage point over the next 12 or 18 months?
• What happens if I lost my job and it took me three months to find something else?

According to Simon: “They can use the spreadsheet to stress test those things, and if you've got a positive figure at the end, then you've thought about all of those what ifs and it's like, I'm okay, I'm protected here. You've thought about those what ifs.”

“[Use] your spreadsheet as a tool. It might be nice and pretty and stuff, but why are you doing it? It's got to give you the info you need to do what you need to do,” Phil concluded.

Tune in to Simon Pressley’s Q&A episode on The Smart Property Investment Show to know more about how to pick the right buyer’s agent to suit your own needs, how to balance your time effectively as an investor, and how confident you should be when using a buyer’s agent from another state.