leapyeah said:
geoff, can you expand more on what you regard as the "critical mass" point, please?
leapyeah,
Geoff will no doubt pitch in as well, but I would think this point is where you hit one or both of your borrowing limits. i.e. Your Debt Servicing Ratio (DSR) or your Loan to Valuation Ration (LVR).
Your DSR is a constraint based on your income or cashflow. Banks will only lend to you if you can afford the repayments.
Your LVR is a constraint based on your net worth or equity. Banks will only lend a certain proportion of the security valuation to you and expect you to pitch in a bit yourself.
To overcome these hurdles is what takes investors really to the next level IMHO. I haven't done this myself yet so still consider myself a novice entry level investor.
Here's some of the ways you can overcome these hurdles:
DSR:
You can use your spare equity and turn it into a periodic annuity in the form of a cash bond. You can then use the income from the cash bond in the declared income on your future loan applications.
You can also invest in positive cashflow asset categories such as managed funds to help your servicibility equation. So long as the managed fund beats your borrowed cost of capital then it is positive cashflow and can count towards servicibility for other loans. Note that banks do discount this income though.
You can increase the yield on your current investments bya myriad of methods such as just putting the rent up, or by adding value to a property via renovation or development as described below.
Time increases your DSR. Increasing rents and increasing personal incomes all help your servicability equation.
LVR:
"Buying wholesale" is a term Michael Yardney uses to describe developing properties to get them for below market value and thereby create both equity and a good yield. This allows you to acquire more properties quicker.
Conversely, cosmetic renovations have been shown in the past to create equity by adding more value than the cost of the renovation.
Paying down your debts is an obvious way to increase your LVR but is a relatively slow method.
Again, time helps your LVR too. Properties typically go up in value so a revaluation can show more equity able to be drawn down via an LOC and used to purchase more properties.
That's just a brief summary of my thinking in this regard. I'm currently at the limit of both my DSR and LVR so will need to start getting creative to continue to acquire more properties, or specifically to be able to afford to develop my current MUH development site. I think my servicability is OK as I've purchased positive cashflow managed funds which help my servicability equation, and I'll probably be able to scrounge together enough equity from my existing assets to tick the LVR box too. A formal feasibility study on the development should assure the bank that they can safely invest in my development provided I can service the loan.
Cheers,
Michael.