Seven things you need to do to finance a property portfolio
Building a property portfolio will establish your personal wealth and give you financial security throughout the course of your life but it is a goal that will require a disciplined, steadfast approach and above all, commitment for the long haul. There are no shortcuts!
There are things you can do right now – and, in fact, should do – that will help you get your foot on the first rung of the investment property ladder.
It’s no secret that we live in uncertain times, which is all the more reason for you to build a source of wealth independent of your own household employment situation.
To that end, I have seven vital points that will help you finance a property portfolio. Some sound hard, but are not as hard as you first think, while others look deceptively simple. We’ll break it down so you can see how you can apply these strategies to your situation and start the journey toward a property portfolio.
1. Increase your personal disposable income
On the face of it, this might sound hard. How do you magically compel your boss give you a pay bump? But in actual fact, it really means looking at your net revenue (your gross income minus bills and other financial commitments) and either increasing the revenue stream or decreasing the outgoings. Ask yourself some question. Do you really need to eat out three nights a week? Can you strike a better deal on your current home loan interest rate? Banks value personal disposable income highly when assessing loan applications, so demonstrating you’re ability to maximise this figure is a good look when making a loan application.
2. Have multiple income sources
In this modern era (and made even more obvious during the COVID-19 pandemic), there is no doubt relying on one source of income makes you more vulnerable than if you have multiple income streams. If you lose one (say, your day job), you have other revenues to defray the financial impact. These multiple income streams can be a second job or your side-hustle. It might even include a modest share portfolio or renting out a spare room. There are many ways to create extra income options.
3. Decrease your living expenses
This strategy sounds hard but again, is deceptively simple. You may think you’ve trimmed your expenses already but go through your banking app and record every payment you’ve made, no matter how small, for the past three months. We are often quick to justify our spending, or quickly say, ‘But I don’t spend frivolously’ without having done the hard work to understand where every dollar goes. So, writing or typing out the outgoings is crucial.
And let me assure you, once you write it down, you will be surprised, maybe on the unpleasant side, as to what you “actually” spend. Your brain needs time to absorb how many times you write “$4.50 Espresso Bean Café” in a month. Then you can make some informed decisions about where to trim. Remember, smashed avocado and lattes are a choice, not an essential item and if you want to succeed, you’ll find a way to survive without these every weekend!
4. No car or personal loans… ever
Do not take out a car loan so you can upgrade the wheels, or a personal loan to consolidate your debts or even worse, to go on a holiday. No, these items should be saved for, just as your parents and grandparents did before you. If you’ve got multiple debts that are getting tough to manage, there are strategies you can consider, but consolidation under a high-interest personal loan shouldn’t be one of them. Also no micro loans, or payday loans, or any loans that are going to not only increase your debt, but cost you more in servicing that debt. Banks look at how much debt you’re servicing and this will count against you as a black mark. Also, it could potentially reduce your credit rating.
5. Reduce your credit card limits
When lenders are assessing your loan application, they focus on credit card limits, not balances. They assume your balance will blow out to the limit, so by reducing your limit, you will improve your chances of accessing a mortgage from a major lender. Also audit the number of cards you have and ensure any you no longer use regularly are cancelled. It’s incredibly common for people to be holding credit cards they didn’t realise they had or need, discovering their existence only after being knocked back for a loan. If you don’t need it – cut it up and close it!
6. Set a budget and understand how much it costs to live
After you’ve completed step 3 above, you should have a clear understanding of how much money you need coming in every month to keep the lights on and put food on the table. Once you’ve cancelled the surplus streaming services, downgraded to the basic NBN service and cut back to one café coffee a week, you’ll be in a great position to know how much additional cash you can save each week/fortnight/month to go towards your goal of a property portfolio. Now is the time to commit a household budget to paper. Monitor it like a business, setting out you projected income, expenses and savings. Then, each month, check you plans across what’s actually happened. By paying close attention to the numbers, you begin to innately keep track of your financial habits on a daily basis. There’s an old saying “What gets measured, gets done” so writing it down will make the 1st big difference but then measuring your success monthly will simply reinforce and consolidate your way to your next investment.
7. Get the best budget help thanks to open banking
In July 2020 new legislation came into effect, called the Consumer Data Right (CDR), which puts the consumer in control of their banking data. It means you have the option to share your data (say, your transaction history or credit card history) with third party organisations so they can provide you with a product or service, such as a budget tool, tailored to your needs and circumstances. This is an opportunity to really get your payments and budgeting into tip-top shape and take those all-important steps towards getting approval for a mortgage for your first investment property.
If you are struggling to find a budget planning tool then I’d recommend this one https://moneysmart.gov.au/budgeting/budget-planner
It’s the Government’s Moneysmart site and has an online version as well as an excel version depending on your needs. You’ll also find some other great tips on the site.
Crossing your fingers and praying for an approval is not an effective path to finance. Instead, get active and apply these seven strategies to get you on the road toward building a great property portfolio.
If you do it, and do it well, believe me, you’ll have plenty of choices and options later in life that you’ll be thankful for, not to mention the great legacy you can leave your kids and family.