Beat The Market and get Extraordinary Gains By Increasing Borrowing Capacity
What’s the biggest reason 71% of property investors only own 1 investment property? Cash flow and servicing must surely be at the top of the list! When we consider that 47% of all rentals in 2021 were negatively geared, it’s no wonder that most investors get stuck at property number 1.
What’s the solution to the cash flow crunch? Well there’s a few different options, let’s have a quick look at a few of them.
Borrowing in a trust or company (special purpose vehicle or SPV). Some lenders will then isolate the income and debt associated with the property owned by the SPV in said SPV. In English, that means because the SPV is solely responsible for the debt, if the income and assets are enough to support the expenses of the SPV, then the beneficial owners are off the hook, and you can effectively recycle your borrowing capacity. This strategy can limit your borrowing capacity though as the tax benefits of negative gearing aren’t available. This needs to be carefully considered under consultation with your accountant and mortgage broker.
Genuine cash flow positive strategies such as short stay (Air BnB) or rooming houses. Rooming houses are quite common on the east coast, however here on the west coast they’re only relatively new and there’s only a couple of people doing them well. Both of these strategies can earn the SPV, and by extension the beneficial owner a 10% net yield, meaning income, less management fees as a percentage of purchase price. That’s a pretty hefty number when you consider that by most standards a 5% gross yield (before management fees are taken out) is a pretty reasonable yield for a long term (normal) rental. These 2 strategies both have pros and cons beyond the scope of this post but it’s important to note that both of these strategies will require additional capital and consideration when purchasing beyond just the standard analysis.
We begin to see a pretty picture when we start stacking all of these different strategies together that it’s possible to be cash flow positive, to preserve borrowing power and importantly to continue growing your property portfolio beyond just 1 property. Don’t be ordinary like the 71% who get stuck at 1 property, be extraordinary.
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