Australian property has long been a popular wealth creation strategy for medical professionals. This is due in part to a history of sound returns, as well as the potential benefits of leveraging and improved tax outcomes. However property also has potential shortcomings and risks which need to be considered before committing yourself.
In particular, of late, banks and lenders are making it more and more difficult for borrowers to access the finance required to achieve their investment objectives.
Through sound planning, a clear investment strategy and a better understanding of your finance choices, you can improve your chance of success and ensure that you’re investment ready for when that next opportunity arises.
SETTING YOUR INVESTMENT GOALS
As time poor professionals, doctors are vulnerable to entering into investments without a sufficient understanding of what it is they are actually looking to achieve. This can often lead to buying the wrong property, setting up an incorrect loan structure, over- committing financially, or buying or selling a property at the wrong time – the outcome of which can result in significant cost and effort wasted.
Establishing clear, attainable goals will provide you with the focus needed to make the very most of your property investing journey. They may relate to life-stage events (children’s education, travel, or retirement); or maximising the value of your practice, or evening fulfilling philanthropic aims. Prioritise these and make sure they follow the ‘SMART’ criteria of being Specific, Measurable, Actionable, Relevant and Time-based. Only once you have established your goals can you begin mapping a path to achieving them.
A BALANCED APPROACH
Whether you invest in property for rental yield (cash flow), long-term gains (capital growth) or a combination of both is one of the key strategic decisions that you will need to make.
Those who invest purely for capital growth usually do so on the assumption that particular properties are more likely to have an above average increase in value over the long term. These properties tend to be negatively geared, meaning the rental income you receive is less than the total costs involved of owning the property. This is often a preferred strategy of high income earners such as doctors as the loss can be offset against other income earned, reducing assessable income and therefore the tax payable.
However the ultimate success of this approach depends on the quality of the underlying asset, not just the prospect of favourable tax outcomes. Careful selection and accumulation of your investment properties is essential, both in terms of the ongoing return and potential capital growth.
Investing for cashflow on the other hand usually means purchasing properties with above-average rental yields and lower capital growth trends. The idea is that the income generated not only covers the holding costs of the property but also generates surplus cash flow.
For many, a favoured option is to utilise a mix of both strategies. A balanced approach is particularly suitable for doctors during their post-graduate training years, when core working income is relatively low.
ALIGNING STRATEGY WITH STRUCTURE
Many doctors tend to carry a reasonable amount of debt throughout their working life so it’s important to ensure that it acts as your servant, not your master. How you structure your loan can have a large impact on the tax you pay, risk exposure, cash flow and your general financial strength. This becomes critical as your portfolio grows.
Generally speaking there are three areas in which a loan and the property itself can be structured — the actual loan type chosen, the property ownership structure/borrowing entity, and how equity in existing properties is utilised. Although each requires careful consideration, it is the last component that is often the deciding factor in structuring considerations.
One issue that can impede portfolio growth is where properties have been unnecessarily cross secured. Although there are certain situations where this can be a useful vehicle, in the vast majority of cases it offers no benefit to you (rather the bank or lender). If possible, it’s best to avoid this structure as it can reduce your control and most importantly, limit your ability to access equity.
A better alternative is to use stand-alone facilities. This involves taking out separate loans for each new property with the deposit and costs coming from an established line of credit or offset account. A more complex approach is to spread your debt amongst different lenders which has the added value of reducing concentration risk, increasing flexibility and in many cases, your borrowing capacity. To understand the options available and ensure that your structure is suitable, always seek independent financial advice.
FINANCE CONSIDERATIONS
Even with careful planning and a clear strategy, many investors are finding the current lending market difficult to navigate as a result of tightening investment lending policies and shifting interest rates. This has lead to greater confusion for borrowers when looking for the right loan.
From tougher income tests excluding or discounting uncertain income sources; reduced loan to value ratio limits; restrictions on equity release; increased assessment rates and rejection of specific securities — these changes are not only restricting the ability of investors to expand their existing portfolios but in some instances preventing them from re-entering the market altogether.
That’s not to mention the number of out-of-cycle interest rate hikes targeting property investors. In the last few months alone we have seen the major lenders increase interest only products by up to 60 basis points. Based on a $2,500,000 portfolio at 75% LVR, this equates to over $55,000 in additional interest repayments over a five year period.
These increases are particularly relevant for those investors who have a variable rate loan in place at the moment or are nearing the end of a fixed term, as they will have a material impact on the cost of your loan and ongoing cash flow considerations.
The good news is that there is still plenty of opportunity for the right type of borrower. Doctors are classified as a low risk profession and this makes you desirable to lenders at a time when they are trying to strengthen their loan books. To take advantage of this, be prepared to look at all your options and leverage the increased competition to align with a lender (or range of lenders) who can assist you to reach your investment objectives sooner.
GROWING THE RIGHT WAY
Whether you are a beginner or a seasoned property investor, success is often the product of getting the fundamentals right. Outsourcing some of this work to professionals who are experts in their field can have a considerable impact on the outcome. The efficiency gained will also allow you to focus on your practice and the patient care you provide.
And remember, before you consider your next move, know where you stand with your finances. Be sure to utilise the services of a specialist finance broker to obtain a loan pre-approval. This will set the parameters for your next investment decision and allow you to research the property market with greater confidence.
To ensure you are in the best position to achieve your investment ambitions contact Jack Meagher on 0456 964 339 or email jack@medipay.com.au