Money matters: What’s holding investors back?

It's not management woes that stop Kiwis from growing their portfolio.

Since the 1990s, owning a property investment portfolio has been the subject of many books, TV series and pricey mentoring courses. The dream: to retire with a collection of cashflow positive properties and minimum debt that will fund a comfortable, if not luxurious, lifestyle.

I’m wholeheartedly in favour of this dream - although I think savings schemes such as KiwiSaver and investment funds should be included in this strategy. So why is it that, according to MBIE statistics, 77 percent of Kiwi investors own just one investment property?

Logistically, self- managing more than one or two investment properties becomes time- consuming and is set to be even more so once the new tenancy rules come into effect. We are a nation of DIYers and often overlook the value of a professional property manager until something goes wrong.

But mostly I see investors simply not have enough income to meet the bank’s servicing criteria. In reality, they have more than enough money to pay for the mortgage, especially these days of 2.5 percent interest rates. But the banks put your income through a series of stress tests to protect applicants from future interest rate increases and this materially affects how much someone can borrow.

Take as an example a couple with a combined income of $ 150,000 and an extra $ 25,000 per year from their current investment property. If they owe $ 1 million on a 30- yearmortgage, they are paying about $ 25,000 in interest and about the same ( in the first year) in principal payments. Roughly a total of $ 47,000 per year in mortgage payments. Quite a lot, but manageable given their income.

But the bank calculates their affordability at around 6.5 percent and, for the investment property mortgage, over 25 years not 30 years. That increases the calculated payments by almost $ 30,000 per year. The bank then scales the rental property income by 75 percent to allow for vacancies and other costs meaning over $ 6000 less “usable” income. Then the bank assumes that the applicants will max out their credit card limits ( even if they pay them off every month) and requires 3 percent of the credit card limit to be taken off their income.

To clarify, the bank adjusts these numbers to protect applicants from future upsets and rightly so. But you can see how quickly a couple with what looks to be ample income to make another purchase runs out of usable income at the bank.

So, if you want to grow a property portfolio, what can you do? The first thing is to appreciate how much secondary debt ( credit cards etc) affect your ability to borrow. A $ 10,000 limit means about $ 46,000 less mortgage borrowing capability so cancel credit card debt and overdrafts where possible. Avoid the short- term hire purchase/ layby debts at all costs.

Secondly, look for positive cashflow properties. Ideally, properties that you can renovate and grow both the capital value and the rent on. These may be quite different to the type of house you would live in yourself which is a difficult concept to get your head around.

Thirdly, increases in your salary means the ability to borrow a lot more. A raise of just $ 5 per hour is around $ 10,000 per year and means you could borrow around $ 100,000 more on a mortgage. An increase in your salary has much more of an effect on your borrowing capability than a rent review because of how the bank scales rental income by 75 percent. Having said that, review your existing rents to make sure they are in line with the market.

Finally, with interest rates so low, work hard to pay down your existing mortgage. This means you can borrow more in the future and also just makes financial sense in the long run.

As you build your portfolio, equity should be an easier thing to build but income will become harder to prove. Stay vigilant with expenses and increase your income if at all possible.

- Rupert Gough is the founder and CEO of Mortgage Lab and author of The Successful First Home Buyer.