Investment tip: How diversification can lead to greater serviceability

While the 5 per cent yield you get from a house is not at all a bad turnout, it can’t put money in your pocket or help you service the asset after you pay for associated fees like council rates, water rates, and management fees.

“You'll still be losing money. You'll be trying to claim a little bit of it back, which is good for reducing your tax, but when you go on to two, three, four [properties], you're going to get stuck with finance 90 per cent of the time,” Eddie explained.

His long-time strategy: Strike balance in your portfolio by diversifying your assets.

The property investor said: “Start small and buy a house, buy a townhouse, buy a unit… then you can effectively grow your portfolio and not shoot yourself in the foot.”

Dealing with lenders

Financing is one of the most important aspects of property investment, but could also be the most complicated, which is why Eddie made it a point to prioritise this as he educates himself about the business of wealth-creation. Knowing how banks and lenders process loan applications have helped him continue growing his portfolio despite unexpected obstacles.

He shared: “When I was up to around four, five properties … I [started] realising how banks work and how they service people … Banks have different calculators and serviceability and checkpoints.”

“I would only basically purchase a property if … [I know] for a fact [that] I'd be able to finance another property after it,” Eddie added.

Before buying a property, the property investor runs through the numbers with the lender or a mortgage broker in order to determine a rough estimate of his borrowing capacity after the purchase.

“I've spoken to a few people [who] got two houses … in Melbourne [with] 4 per cent yields, 5 per cent yields … Afterwards, they can't borrow any money from the bank because they're all too negative,” he said.

‘Good structuring’

Building a good multi-property portfolio, according to Eddie, is all about “good structuring”—from choosing the right assets in good areas to selecting the right financing options. Having a smooth journey towards wealth-creation depends largely on one’s serviceability, so it’s important to consider the different drivers of growth before investing in any real estate asset.

Some property investors get themselves stuck due to misinformation or ill-advised financing decisions.

For example, according to Eddie: “If they purchase … in joint names … then you go back to purchase in your individual name, the bank will usually assess that first property as you own the debt a hundred percent, even though you are splitting it with your partner.”

“Also, when it comes to rental income for that property … say, if it's $400,000 and it's $400 a week rent … they're only going to assess usually half the rent.

“Take it with a grain of salt. Do your research regardless,” he added.

Real estate editor Tim Neary reminds property investors: “[Lenders are] going to be as conservative as they can ... in terms of making their serviceability calculations.”

Sometimes, one finance-related mistake could mean tough consequences, especially if it’s made early on in the journey. For property investors who get stuck, the options are either to sell the property or restructure it, which both entails additionals costs.

“Structuring is a huge thing, along with finance, along with finally finding the property,” Eddie concluded.

Tune in to Eddie Dilleen’s episode on The Smart Property Investment Show to know more about why he branched out into different markets around Australia instead of sticking to his backyard, as well as the unexpected setbacks he faced along the way. 

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