The balancing act of property investment
From WikiProperty
If you are wanting to become a serious property investor you will need to pay particularly close attention to balancing your cashflow and equity to stay permanently in a position to buy more property. It appears that those who are always in a position to buy, seem to, eventually uncover some of the very best buying opportunities. To continually position yourself to buy more property you will need to understand (and learn to balance) the concept of the 2 borrowing keys and then only purchase properties which can enhance these 2 keys.
The 2 borrowing keys are Cashflow and Equity. These keys are used by the banks to “qualify” your application for mortgage finance. The banks use these formulae to calculate how much you can borrow based on each key. Usually 1 of these 2 keys will enable you to borrow less than the other key and the banks will usually only lend you up to the maximum of the lower of the 2 keys borrowing capacity. If 1 of either of these keys become too weak you may no longer be in the luxurious position of being able to borrow to buy more property.
The common cases I have found where imbalance becomes a problem are: (A) Limited equity to borrow against but a strong cashflow to service debt.
OR
(B) Limited cashflow to service debt but strong equity to borrow against.
To “balance” these 2 keys is to make sure the weakest of the 2 keys doesn’t become too weak resulting in your inability to borrow. No-one has endless access to mortgage finance and every previous property purchase impacts on your ability to borrow to buy more property... Experience tells me those who only buy properties which at least strengthen their weaker key are able to continue buying whilst other investors can become “hamstrung” in their borrowing ability whilst they wait for values (Equity) or rents (Cashflow) to increase. If you can identify which of these 2 keys is the weaker then you can identify the ingredients your next property purchase must possess before you buy it.
You should also be aware that your present strength may become a weakness at a later date (and vice versa) due to value and rental price movements. You should continually reassess your position prior to each property purchase and master this balancing act if you wish to be a serious property investor.
To download your free (demo) ebook go to http://www.mortgagenet.co.nz/ebook.phtml You will be able to read one chapter for FREE.
Return to Items of Interest
