For investors who are just starting out, choosing a strategy can be one of the most overwhelming and confusing aspects to the investing puzzle. With so many options and the fear of making mistakes, it is enough to stop many new comers in their tracks. This month I will demystify the process of choosing a property strategy that is right for you and reveal 7 key ingredients that create the foundation of developing your own property strategy.
1) Existing Cash Flow
One of the first considerations when developing your own property strategy is to assess how much cash flow you can contribute to your investment portfolio every month. To do this start by creating a budget that accounts for all of your current commitments and discretionary spending. Once your budget is complete you will have a clear indication if you have a cash surplus or are in negative territory. Knowing your cash surplus position gives you the first clue as to what type of cash flow you need to derive from your property strategy.
For example:
High cash flow — allows you to take on strategies that have higher holding costs
Minimal to no surplus cash flow — means you will have to focus on strategies that give you higher cash flow
2) Cash deposit or equity position
Your equity position plays a large part in defining which strategy to use because it is a parameter that lets you know if you have enough equity for only one purchase or many. It also determines if you have enough equity to fund the outgoing costs associated with certain property strategies.
For example, funding a renovation or carrying the holding costs of a development can be paid using equity, but if you do not have enough equity to cover the purchase costs, deposit, and the capital required to carry out a renovation or development, you can immediately cross these strategies off your list and focus on other strategies that require less equity.
3) Borrowing Power Assessment
The borrowing power assessment is also known as your “Borrowing Capacity” or “Serviceability”. Your borrowing capacity is worked out by the bank or a mortgage broker using a predetermined set of calculations based on your specific financial situation.
This is a vital consideration to choosing your overall property strategy because without a bank willing to lend money for the types of properties you want to purchase, you cannot proceed with any purchases, at least not under a traditional lending scenario.
When you understand how the bank is assessing your finances, you can tailor your strategy so that you get an easy “yes” from the banks.
4) Think Two Steps Ahead
Now that you know your borrowing power, surplus cash flow and equity position it is time to bring all of that information together to form the foundation of your personal property strategy.
Most investors will be very strong in one aspect of their foundation and weak in another. For example, you may have very strong surplus cash flow but very little equity or plenty of equity, but very little surplus cash flow or perhaps low borrowing capacity.
A well chosen strategy can help you to overcome the “weak spot” in your foundations and bring your foundation to a stable footing or better, make you strong in all the 3 aspects, 1) Borrowing capacity 2) Cash surplus 3) Equity position.
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