Deciding where to buy is first determined by your borrowing power (covered yesterday). There is a tendency for investors to want to max out their borrowing power. You may want to second guess this approach.
We should not always buy investment properties up to the maximum borrowing power we have on offer because this makes buying again later even harder.
The aim, in the long term, is to build a portfolio that is bigger with more passive income.
If we overleverage too early, this will limit our borrowing power in the medium term and stunt the growth of our portfolio. The foundation of the portfolio is grounded in the returns because a higher mortgage coverage will allow for greater total investments which will mean a bigger portfolio.
Running out of borrowing power jeopardizes us reaching our passive income and property investing goals. If we invest blindly using solely hope and emotion, it is unlikely we will be lucky enough to reach financial freedom. Investing smarter, based on education and numbers, requires about the same effort and time, but increases the odds of success significantly.
Let us first define and understand the terms then we can look at the numbers. When we look at goals, later in the course, we will be able to reverse engineer how to reach them much easier.
Annual Rent divided by the Total Cost (purchase price + renovations and costs to settle). Important for quick analysis of properties when measuring similar opportunities against each other. This is a pretty simple number though and does not help us meaningfully decide yes or no for a property investment purchase.
The Profit; Annual Income minus Expenses then Divided by the Total Cost. Net yield is far more important than Gross because we want to assess if we are cash flow positive and by how much to see if we are willing to commit to more analysis and if this property is a serious candidate for purchase.
Net Profit divided by the Cash/Equity Invested. The goal of property investment is to get the biggest return on your own cash while minimising risk, effort and speculation.
More detail in video 55 in the property formula workshop course.
Annual Rent divided by your Current Mortgage (for the property in question). This figure is super important if you want to keep investing. If you only want to buy one more property it is not as important, but to grow a portfolio, this figure plays a big part. Mortgage coverage is why so many astute investors will add minor dwellings, bedrooms, and 2nd/3rd homes to their existing properties to bring the yields up and the mortgage coverage figure into the golden 10.5%+ range that allows for more borrowing.
This is a funny principle. It greatly depends on the parameters and can be unfairly altered if you ignore some important aspects. Do you factor your time into the equation? Because most ignore this factor. Do you consider the risk of the investment? Because most people ignore that too.
Bitcoin and other Cryptocurrencies have had massive ROI in a short space of time but most commentators ignore the fact they are super risky and unpredictable. Not to mention volatile.
We are not speculators here… we like to talk about safer and more predictable avenues for our money and our time. So if you want to get a good return on your money, and your time, you have 3 obvious choices:
There is nothing wrong with any of the choices you make, but call a spade a spade. Speculating is not a strategy for building wealth, it is a hope that things work out. The numbers are important but they often ignore risk which you need to analyse yourself.
Typically, the suggestion for a lot of investors is to buy what and where you know. You will have people saying –
“If you live in Area XYZ then buy in the surrounding suburbs so you truly understand the value of what you are buying.”
You will have the most knowledge of schools, traffic hubs, and up and coming developments. You will be able to spot a deal and manage the property yourself if that is what you prefer. This is sound advice if you live in a good area for investing based on the numbers and the predicted future for the area. Many investors slowly succeed with this approach.
Most people will need to consider investing outside of the area they live in if they want to build up a portfolio that will generate a lot of passive income. This is because opportunities for the best yields and most importantly cash on cash return are in areas where refinancing with a higher valuation is more likely.
The yields you achieve when buying are most often not sufficient to allow you to recycle your initial deposit. This is why adding value quickly is important and buying undervalue is critical. Remember the 3 C’s we talked about on Day 1.
If you are chasing yields and decide to invest outside of the metro areas of Auckland, Hamilton, Wellington, Christchurch, it is far more likely you will get 10%+ yields. Having said that, many of the BEST investments we have seen are in these metro large city areas and the opportunity to get a big win is just hidden in the numbers as most people do not use spreadsheets when buying. Using the numbers you will be helped to see what others do not.
Just remember medians and averages obscure deals. If Auckland’s median house price is $900,000 – half of all houses are cheaper than that.
This is a video from the Property Formula Workshop. There are several unlocked for you and included in this course. To get access to all videos and spreadsheet calculators please apply for the workshop.
If you want your own spreadsheets to work off, and to understand them, keep continuing with our mhq education pathway. The 21 Day Course is Step 2, next up is Step 3 the masterclasses, from the masterclasses you will get an opportunity to join the flagship course the Property Formula Workshop which is Step 4.
Buy the masterclass and then the course, it will save you a tonne of time and hassle when building up your portfolio.
Your journey to financial freedom will typically follow a path consisting of 3 Mortgage Lifecycle stages.
Stage 1: Reduction. Main goal: if investing – building $120,000+ of usable equity asap, or getting your home mortgage-free quickly, often in 10 years or less.
Stage 2: Expansion. Main goal: building your first $70,000 of annual rental income while refining your strategy for recycling equity, repeat, repeat, repeat…
Stage 3: Optimisation. Main goal: increase passive income to replace wage income, minimise time requirements, orchestrate big wins.
To take control over your portfolio purchase the relevant masterclass, or purchase all three for a special price of just $37 – this special offer appears when you check out.
A mortgagehq adviser will help you assess your options and plan accordingly. Would you pull your own teeth or go to the dentist? Would you like a professional to help or prefer to make it up as you go along? Most of the time, it is free to work with the mortgagehq team. In cases where there will be a fee, we will disclose upfront before any work is done.
P.S. tomorrow we are covering probably the most important subject… if you want more insights then check out these videos: