How lending and cash flow affects the growth of a property portfolio

“[I] need to explore [a] bit more and also learn more from it,” the property investor added.

Eric also wants to start doing small development projects as well as investing in small commercial properties.

Expanding the portfolio

Lending and cash flow are two of the reasons why Eric decided to look into newer investment strategies.

He explained: “Let's give you a simple example: If you accumulate lots of residential properties, the ongoing cost is quite high ... all the bills [are] quite high. You will not get much cash flow from residentials. You need something … to sustain the existing portfolio.”

As a property professional, Eric spends time working with fellow investors and helping them build their own property portfolio and ultimately create financial stability. Based on his observations, most of the property investors who have successfully accumulated $3 million-worth of properties are finding it hard to expand their portfolio any further unless they have a really high income.

According to Eric: “For them, it's probably [a] good idea to … activate debt reduction. The people in the middle tier—$1 [million to] $2 million—they still have an opportunity to … hold onto it.”

First-time investors, meanwhile, use the equity from their principal place of residence as a deposit for their next investment.

Smart Property Investment’s Phil Tarrant explained: “They'll just increase the loan on their principal place of residence to finance a deposit … then they'll take another loan against the investment property.”

Some budding investors take either principal and interest loans or interest-only loans based on their serviceability and desired cash flow, while some take a combination of both.

“It's mainly about the stability and ... cash flow. … With the principal interest, the rate is pretty low compared to interest-only [loans but it’s] easier to get. That's why we split in part of principal interest, part of interest only—[keeps] the security and the flexibility,” Eric said.

Lending policy

Aside from one’s personal financial circumstance, an investor’s serviceability is also affected greatly by the policies implemented by banks and other lenders. 

Moreover, the Australian Prudential Regulation Authority (APRA) has also made changes in lending regulations in order to slow down the rampant price growth in major Australian property markets. These policies are making it harder for property investors to get debt at the moment and expand their portfolio.

According to Eric: “[It’s harder to get debt due to] the changing of the lending policy … Savings [are also] getting tighter and tighter [because] the income has not increased much compared to a few years ago.”

His advice for budding property investors: Find properties with a good combination of capital growth and cash flow to ensure the sustainability of your portfolio.

“Say you're lucky, find a property at [a] really high window yield—say 9 per cent … Some lenders will cap it at 6 per cent. You'll not take more than 6 per cent,” he concluded.

Tune in to Eric Wu’s episode on The Smart Property Investment Show to know more about his perspective as a mortgage broker as well as the common struggles that first-time investors are currently facing.

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