Let’s talk about the harsh reality of property investing today, and why the media’s narrative of investors needing to aspire to build a huge multi-property portfolio, is actually out of reach for most people.
Times have changed – what a lot of investors were able to achieve 10 to 30 years ago is nearly impossible to achieve today.
Because I know I’m likely going to upset a few people with the comments that I’m about to make, but there’s no question that 20 years ago, buying property and dealing with the banks was a whole different kettle of fish.
There was little regard for how much money you earned and more emphasis on whether the property deal you were looking at stacked up. And so, there were people who published a whole range of books to emphasise the ease around building huge portfolios.
One of those people is Steve McKnight. He wrote books about creating a hundred plus property portfolio in a concise space of time. And kudos to him – what a fantastic individual to achieve such huge milestones in such a short space of time.
But, I think the market has shifted on that front regarding your ability to access finance.
Accessing Finance
The shakeup of the global financial crisis really put the wind up a lot of banks. Many regulatory authorities have come in and said that they need to tighten the purse straps.
And so the hoops that you have to jump through to find funds to borrow for property has become infinitely harder.
Responsible lending and everything that goes with that means that borrowing money is no longer just about the deal itself.
In fact, after my experience both personally and working with hundreds of investors over the last decade, I believe the number one limiting factor for borrowing from the banks is your own income.
Real Estate Prices
If you combine that with the second factor, which is that the ratio between the price of real estate and an individual’s earnings – it’s not as easy to create these huge property portfolios.
For example, in the year 2000, I earned around $80,000, as a qualified chartered accountant. That was a mediocre kind of income back then.
On an $80,000 salary, the first house I bought was around $223,000 – that was a multiple of four, or at best or three and a bit of my income.
Whereas these days it’s not uncommon for people, who earn around $80,000 to $150,000, pushing to go and buy properties above $750,000 to $1.2 million.
So you can see straight away how affordability has really skewed over the last 20 or 30 years.
The Million Dollar Question
If you combine the fact that the cost of real estate has grown exponentially with the fact that borrowing is challenging, you can see that it’s just so different to what was available to people who had the means to get into property back in the day.
I’m not trying to say that you can’t build wealth through property. There’s no doubt that as business owners, we need to be investing in real estate.
But, the question is what kind of real estate – especially if you have a limited amount of borrowing capacity and a limited volume of properties that you can buy.
I guess that’s the million-dollar question that every investor is trying to figure out.
If I were starting from scratch today, I would undoubtedly lean into the properties that will give me the greatest ability to achieve capital growth.
And depending on what my earnings and financial situation were, I’d either carry some negative cash flow to achieve that; or if I couldn’t afford that, I’d be looking for properties in regional areas where I could purchase an asset with good growth prospects and where there is at least a neutral cash flow.
I would then be doubling down on trying to acquire as many properties in the shortest space of time.
Even my clients who have impressive incomes are having challenges getting funding from the bank.
So my general feeling is that, if you’re on a more modest income (anywhere between $80,000 and $200,000) or if you’re in a growth phase of your business, the exercise that you want to undertake is continuously checking in with lenders about borrowing capacity and continually speaking to business bankers.
I say this with all due respect – there are some epic brokers out there, but there are also some super crappy ones too.
From a building wealth point of view in the early stages, the broker is one of the key relationships you need to have in your arsenal.
So my suggestion is that you should do your research and find the people who are getting the hard baskets over the line because even though you might not start off in the hard basket, you will potentially eventually become a hard basket case as you start to push the envelope and hit that borrowing limit.
Key Takeaways
If you know that you can’t borrow more than a certain amount and that you are limited by the number of properties that you can buy, you need to move quickly because time is what does the heavy lifting for you.
Time is your friend.
Once you have reached a position where you feel that you have exhausted your borrowing capacity and you really can’t create any more wriggle room, or you just recognise that maybe you just don’t want to borrow more to go down the path of owning more real estate, that’s the point in time where, in my opinion, it’s time to change gears.
It’s time to open the mind to other alternative innovative, predictable and sustainable cash flowing investments so that you can continue to grow your wealth.
Otherwise, you end up in a situation where you stagnate because of the banks’ limitations and the expensive real estate market. Your only choice will be to sit on your small property portfolio for another 20 to 30 years until it becomes something meaningful.
That might be okay for some, but for those who want to have an impact in the world, that’s a crucial part of the journey.
By just recognising that the rules of the game have shifted, you can find ways to be a step ahead in terms of how you bridge the gap between where you are and where you want to be.
You’re interested in fast-tracking towards being financially free; please check out my programs, where I help you get onto the path of generating a passive income through investing. If you’re interested, get in touch today!
