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¿ LEVERAGE BALANCING ACT
QI’m keen to buy another investment
property but I’m already heavily
geared. My wife and I currently own four
properties. Do you think it’s best to just
borrow as much as we can and struggle a
bit now, knowing the market will probably
take off in Sydney and Brisbane, or is it
better to pay down debt but miss potential
growth in other properties?
AOne of the things I always find
when people ask me questions
about investing is that there seems to
be a misconception that there’s one
magic rule, or one single way to invest
in property. The feeling therefore is that
everyone should go follow this rule.
Nothing could be further from the truth.
When the time comes to invest in
your first property, or to invest again,
a complete examination of both your
current and immediate future financial
circumstances must take place.
Among the things that must be
> What’s your current cash flow?
> Are you managing to meet your daily
> Do you have events that may come
up in the coming few years, which
may draw on more of your available
> What are your family’s needs in terms
of education expenses and other big
> How secure is your job?
> How long until you plan to retire?
> If you invested and lost money, how
would this impact you?
> What’s your attitude to risk?
As you can see, there’s much to consider
and the answers to these questions will
help to govern how you move on from
For example, if you have young children,
set incomes and low personal cash flows,
then you must preserve what you have
and only invest again in property that
won’t place a strain on this already low
If you have a job that isn’t secure, then
care must also be taken. You should
ensure that you keep fairly good margins,
so low loan-to-valuation ratios in any
property you do own to provide a buffer
on which to draw if something goes awry
financially in the future.
If on the other hand you’re a young
couple still years off having a family, or an
older couple with grown up children but
still 10 years or so from retirement and
both have good incomes and the capacity
to withstand short-term losses if they
occur, you may wish to gear a little higher
and take the plunge.
Remember though, property doesn’t
always go up in value and it’s naïve to
think that a market will “probably take
off”. While property may eventually grow
in value, you can never be sure when
you’re going to need to access any equity
you have in your portfolio.
This time may come prior to when you
planned it, as would happen in the case of
unforeseen financial difficulty, loss of a job,
medical emergency and so on.
If you’re too highly geared you may have
no room to move and could end up with a
loss rather than a sure gain.
Your next steps should be to consult a
qualified property investment adviser, one
who doesn’t also want to sell a property to
you, and establish your own risk profile.
Then, as part of your property
acquisition plans, you should include a
strong debt reduction strategy to ensure
that you’re always gaining equity, even
when the market is stagnating.
¿ WHERE DO I START?
QI’m in my 40s and looking for my first
investment property. I can borrow
over a million dollars but would rather only
borrow $400,000 for my first go. Do you
think it’s best to look at cash flow over
growth assets at this time and am I being
too conservative in today’s market? My
friends think I am.
AThe very first piece of advice I can
give you is this – don’t listen to your
friends, unless one of them happens
API experts answer questions from readers
to be a qualified property investment
adviser. I’m wondering how many of
them have built large portfolios for
themselves and can actually provide you
advice that’s matched to your personal
circumstances, risk profile and current
I’d be willing to hazard a guess and say
none of them match this description, and
while friends are well-meaning, many a
mistake has been made when investors
take advice from people who aren’t
qualified to give it.
You’ve said that you could borrow $1
million but would prefer to only borrow
$400,000 for your first investment,
and from this I’d like to make
Firstly, the fact that you can borrow $1
million doesn’t mean that you should
spend that amount on one property.
Such a borrowing capacity could buy
you three properties and you could start
with three entirely different assets in
various areas, all of which provide a
different opportunity for growth and
This way you’d be diversifying and you
could choose properties with immediate
growth potential, as well as ones with
more long-term growth but possibly a
higher cash flow in the first instance.
Of course every property you choose
should have the potential for both to
occur in the period you intend to hold it,
however in most cases an area is either
growing in value or yield – rarely do the
two happen concurrently.
Secondly, if you’re saying you’d prefer
to only go with $400,000 to start with,
then this is telling me you have a low risk
profile, and so you must take care when
you do buy.
Your friends may tell you that you’re
being conservative, but we all have
different appetites for risk and they must
æIf you have young children, set incomes
and low personal cash flows, then you must
preserve what you have and only invest again
in property that won’t place a strain on this
already low cash flow.Æ
Q&A // BRICKS & MORTAR
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