How to grow a multi-million dollar portfolio on an average income

What a fantastic read full of informationI I read a lot on these forums and want to start out on the investment property venture however I don't believe I'm ready just yet the wait continues. Thanks
 
For those interested, I thought it was worth sharing some principles that allows investors on average incomes to grow multi-million dollar portfolios. The most common response I get when I talk about borrowing power with clients in todays low rate environment is a sense of shock/excitement after planning their finances and seeing how far they can really go.

I should caution the below with what banks are willing to lend to you and what you can afford may be two separate numbers. Having appropriate buffers/insurance in place is necessary, especially as the portfolio grows larger.

So, how does someone on an average income grow a multi-million dollar portfolio?

In the main, it comes down to:

1. 'Ordering your lenders' appropriately and switching lenders at the right times. One of the more common pitfalls is going direct to the same bank and thinking the party's over once they say no. In reality, if you're at this point, the party's likely to be only starting out for you.

2. Protecting your borrowing power: Being educated about what impacts your borrowing ability early will allow you to 'maximise' your borrowing power and get you to the extremes of where you can go. You'll also need to keep your credit file clean.

3. Purchasing at decent yields (6%): By doing so, and swapping lenders, you can actually increase your borrowing power for your later purchases.

Doing the above 3, someone on an average income has the borrowing power to grow a very large portfolio.

Breaking it down

Imagine you?re a new investor looking for your first investment property and work out that you have a borrowing power of say $500,000 with most lenders. You then go to ANZ/Westpac/CBA and purchase your first place with a 6% yield. You've started. :)

After you've gone and purchased a property for $500,000 and soaked up this borrowing power, if you go back to the same bank, your borrowing power with the same bank is likely to be around ~$350,000-$400,000. While it is common thinking that you need to purchase at a 8.5%+ yield to improve your borrowing capacity, this is only true if you STAY with the same bank.

However, if you moved to another bank that takes your existing debt at your actual repayment, your borrowing power may in fact be $520,000 - higher than it was originally despite a relatively achievable yield!

Getting a bit technical (for those that love numbers!), banks calculate your borrowing power by comparing your income to your assessed expenses. They then get to an overall 'surplus' figure and base your overall borrowing capacity on this 'surplus' number. Now if you've already purchased at a 6% yield and are paying a 4.5% interest only repayment, your borrowing power may INCREASE from your original calculations (bear in mind that only 80% of rental income can generally be used).

Panning this concept out

For an entire property portfolio, you can now form a strategy/plan to extract as much borrowing power as possible. In general, to maximise your borrowing power, start by borrowing as much as possible from lenders that treat debts held with them vs debts with other banks similarly (foundation lenders). Then swap to a slightly more generous lender that adds a small loading (CBA for example). Finally, you move between the following 6-7 lenders that take debts at actual repayments: AMP, Firstmac, MEbank, Adelaide?s funding line, Macquarie or NAB.

To maximise this approach, bear in mind that some of these lenders have quirky policies to those with large portfolios ('rent reliance' policies) which can rule them out. Some aren't that friendly for complex/deep portfolios (MEbank), so they can be ruled out too. AMP need to be used before you've hit 10 properties. Firstmac will only use 70% of rental income for deeper portfolios.

This leaves NAB and Macquarie. The two lenders brokers on the forums keep saying to 'keep up your sleeve' until needed. Note NAB credit score, which may be tricky to navigate around for those repeat investors.

For simplicities sake, I've excluded the ability to generate 'deposits' from the equation altogether. This obviously is a key element to growing a portfolio and has its own considerations.

Realistically, you're likely to need to release equity from your foundation properties over time. Soon enough, you won't be able to borrow any more from your 'foundation lenders'. This will likely mean refinances from your early lenders to your later lenders.

Furthermore, everyone's situation is different and have their own personal quirks in employment, securities, income, etc. This will mean you may need to choose certain lenders.

As others have pointed out in other threads, there's no silver bullet to all of this this. The above is just a generalised roadmap designed to educate how someone grows a large portfolio with an average salary.

Cheers,
Redom
Someone taught you well, grasshopper!
 
I am certainly doomed then

Got NAB (Homeside) and Macquarie for 3 IPS and Westpac PPOR

No hope for me
Nah - not at all.

There are quite a few other lenders similar to Mac and homeside that can be used up later on too.

From my experience - investors generally run out of equity/deposits before hitting a servicing wall.

Cheers

Jamie
 
Yep - can go well into the millions with a much lower income too, using the same principles outlined.
Property investing / Portfolio building is not about property - its about finance!

Property is merely what banks take hold over as security for loaning you the finance in the first instance.

Structuring one self correctly so as to be in a position of being able to continually access it when ever you want is vital - whether it be for investment/business and/or lifestyle.

We built a multi-$million property portfolio spread across Australia on less than the average wage starting out in 2000 and with pay rises over the years worked up to the average, to finally exit the rat race last year.

Living proof it can be done.

Kudo's to you redom for your post. I tried to give kudo's but I was told I needed to spread the love around elsewhere. :(
 
Last edited:
Noice....add to this:

4. Diversify your portfolio not only suburbs in a city but also spread it across the country. Banks look at the risk attached to your portfolio when you get past 10...they don't want you holding all 10 in Mt Duie!

5. Balance the portfolio with yield and capital growth. A couple of years ago I started a thread on a the balanced approach...whilst yield is the petrol in the tank....the capital growth is the nitro which will help you build your portfolio quickly.

6. Be greedy when others are running from a market...and be fearful when others are greedy! Current Sydney investors take note!

7. Once you hit over 10 properties....look at buying newer properties...plan for the day when you get 100k in net income from properties. The depreciation from these will save you a fortune and help build further deposits.

8. Aim to have LOTS of cash in offsets...revalue and put into an offset. This will ensure that you navigate any issues comfortably.

9. Finally there is no reason someone starting today cannot get up to 20-30 properties in 15-20 years in capital cities. Buying on the back of Thargminda..will just give you headaches....

For those interested, I thought it was worth sharing some principles that allows investors on average incomes to grow multi-million dollar portfolios. The most common response I get when I talk about borrowing power with clients in todays low rate environment is a sense of shock/excitement after planning their finances and seeing how far they can really go.

I should caution the below with what banks are willing to lend to you and what you can afford may be two separate numbers. Having appropriate buffers/insurance in place is necessary, especially as the portfolio grows larger.

So, how does someone on an average income grow a multi-million dollar portfolio?

In the main, it comes down to:

1. 'Ordering your lenders' appropriately and switching lenders at the right times. One of the more common pitfalls is going direct to the same bank and thinking the party's over once they say no. In reality, if you're at this point, the party's likely to be only starting out for you.

2. Protecting your borrowing power: Being educated about what impacts your borrowing ability early will allow you to 'maximise' your borrowing power and get you to the extremes of where you can go. You'll also need to keep your credit file clean.

3. Purchasing at decent yields (6%): By doing so, and swapping lenders, you can actually increase your borrowing power for your later purchases.

Doing the above 3, someone on an average income has the borrowing power to grow a very large portfolio.

Breaking it down

Imagine you?re a new investor looking for your first investment property and work out that you have a borrowing power of say $500,000 with most lenders. You then go to ANZ/Westpac/CBA and purchase your first place with a 6% yield. You've started. :)

After you've gone and purchased a property for $500,000 and soaked up this borrowing power, if you go back to the same bank, your borrowing power with the same bank is likely to be around ~$350,000-$400,000. While it is common thinking that you need to purchase at a 8.5%+ yield to improve your borrowing capacity, this is only true if you STAY with the same bank.

However, if you moved to another bank that takes your existing debt at your actual repayment, your borrowing power may in fact be $520,000 - higher than it was originally despite a relatively achievable yield!

Getting a bit technical (for those that love numbers!), banks calculate your borrowing power by comparing your income to your assessed expenses. They then get to an overall 'surplus' figure and base your overall borrowing capacity on this 'surplus' number. Now if you've already purchased at a 6% yield and are paying a 4.5% interest only repayment, your borrowing power may INCREASE from your original calculations (bear in mind that only 80% of rental income can generally be used).

Panning this concept out

For an entire property portfolio, you can now form a strategy/plan to extract as much borrowing power as possible. In general, to maximise your borrowing power, start by borrowing as much as possible from lenders that treat debts held with them vs debts with other banks similarly (foundation lenders). Then swap to a slightly more generous lender that adds a small loading (CBA for example). Finally, you move between the following 6-7 lenders that take debts at actual repayments: AMP, Firstmac, MEbank, Adelaide?s funding line, Macquarie or NAB.

To maximise this approach, bear in mind that some of these lenders have quirky policies to those with large portfolios ('rent reliance' policies) which can rule them out. Some aren't that friendly for complex/deep portfolios (MEbank), so they can be ruled out too. AMP need to be used before you've hit 10 properties. Firstmac will only use 70% of rental income for deeper portfolios.

This leaves NAB and Macquarie. The two lenders brokers on the forums keep saying to 'keep up your sleeve' until needed. Note NAB credit score, which may be tricky to navigate around for those repeat investors.

For simplicities sake, I've excluded the ability to generate 'deposits' from the equation altogether. This obviously is a key element to growing a portfolio and has its own considerations.

Realistically, you're likely to need to release equity from your foundation properties over time. Soon enough, you won't be able to borrow any more from your 'foundation lenders'. This will likely mean refinances from your early lenders to your later lenders.

Furthermore, everyone's situation is different and have their own personal quirks in employment, securities, income, etc. This will mean you may need to choose certain lenders.

As others have pointed out in other threads, there's no silver bullet to all of this this. The above is just a generalised roadmap designed to educate how someone grows a large portfolio with an average salary.

Cheers,
Redom
 
Sounds great but, yeah sorry about the but, what happens when there is no property boom and prices stagnate or fall. You then got to ride it out, could take years.
 
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Sounds great but, yeah sorry about the but, what happens when there is no property boom and prices stagnate or fall. You then got to ride it out, could take years.
You then change the name of this thread to "how to grow a multi million dollar portfolio of debt". ;)
 
You then change the name of this thread to "how to grow a multi million dollar portfolio of debt". ;)
Whoa....oc1.....I suppose if there is a cash buffer then some of that cash could be used in equities or other income producing activities but it will be gut wrenching.
 
Sounds great but, yeah sorry about the but, what happens when there is no property boom and prices stagnate or fall. You then got to ride it out, could take years.
Rate hikes are another thing to consider too.

Lenders are basing their serviceability calculations on rates which are at an all time low.

For that reason - it's extremely important to assess your own household budget and work out what's actually affordable for you (based on a higher rate than what's on offer today) - rather than what AMP, Nab, Mac and the like are willing to lend.

It could be quite stressful having a lowish income, a mill or two in debt and seeing rates start to rise.

For that reason - a cash buffer is quite important too.
 
Rate hikes are another thing to consider too.

Lenders are basing their serviceability calculations on rates which are at an all time low.

For that reason - it's extremely important to assess your own household budget and work out what's actually affordable for you (based on a higher rate than what's on offer today) - rather than what AMP, Nab, Mac and the like are willing to lend.

It could be quite stressful having a lowish income, a mill or two in debt and seeing rates start to rise.

For that reason - a cash buffer is quite important too.
Yep, like any asset class for investment one should always be working towards maximising cash flows and minimising risks where & when ever possible.
 
Sounds great but, yeah sorry about the but, what happens when there is no property boom and prices stagnate or fall. You then got to ride it out, could take years.
By doing nothing, you're riding it out for more years to attain mediocrity any way.
 
Great post Redom! Forwarded this to a few friends already :)

Good to break this down, a real eye opener for investors starting out. It's amazing what the possibilities are with the right loan structure.
 
I am certainly doomed then

Got NAB (Homeside) and Macquarie for 3 IPS and Westpac PPOR

No hope for me
Not at all mate, there's plenty of other ways to work it.

As I mentioned in the post, over time as investors grow their portfolio, they work themselves to your lenders anyway.

Perhaps get your broker to check your servicing with Westpac other middle tier lenders for your next deals - if it doesn't work, try and spread between some of the others that take actual repayments. With a few properties up your sleeve, you may still have those options available to you. If possible, i'd leave some firepower with Macquarie to be used down the track.

Cheers,
Redom
 
Property investing / Portfolio building is not about property - its about finance!

Property is merely what banks take hold over as security for loaning you the finance in the first instance.

Structuring one self correctly so as to be in a position of being able to continually access it when ever you want is vital - whether it be for investment/business and/or lifestyle.
Great advice Rixter, completely agree with your first line (as its how I view my own investing).

Is there a Rixter interview available to read for the SS community? :) ;)
 
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