A crucial element of property investing: Numbers

For our first blog article, we're going to explore why understanding your portfolio / property numbers is crucial for long term property investment success.

The last three decades have been a boon for investors but rest assured, we are unlikley to see further periods of 10%+ capital growth year after year. As investors ourselves, it's become more crucial than ever to evaluate:

1. The performance of your portfolio
2. Cash flow needs (especially if there is a downturn)
3. Systems that you've created to manage your cash flows / bookkeeping

Measuring the performance of your properties

As property investors seeking financial independence or a secure passive income, it's important to measure the return (capital gains and income) your properties generate. We need to understand whether the property is outperforming the national or local property market (to see if we're beating the "average investor" in terms of capital growth and quantum) as well as the net cash flow the property generates after expenses, including the unexpected water heater breakdown, yearly vacancies and leaking taps. After all, we're purchasing the property to make us money, and if we don't measure the money we generate over time, then we won't be able to determine when and if we will achieve our goals. The best investors who build significant portfolio also evaluate each property purchase over time to tweak their strategy and become better investors (including selling the lemons in the portfolio, even for those who undertake a buy and hold strategy).

Understanding your cashflow needs if there is a downturn

Life is unpredictable. As property investors, we are constantly exposed to multiple risks on our goal to financial independence. Potential risks include:

1. Your property could become vacant for a long period of time
2. Interest rates could rise significantly
3. There could be unexpected repairs or maintenance
4. You could lose your job

A lot of investors who are forming large portfolios / seeking financial independence, need to be able to quantify and mitigate these risks. Companies do this on a daily basis and banks do this every minute of the trading day. As investors, we also need to protect the downside to mitigate the risks we're taking when undertaking property investment. This could include stress testing (we've built a tool for this in our platform) as well as setting aside a portion of cash (preferably in an offset account) that would cover any cash flow shortfalls for the unexpected in the event of a downturn. Personally, I like to set aside at least 6 months of my minimum spending (including interest and personal expenditure). This was lowered from 12 months before I had adequately diversified my portfolio and obtained a number of positive cash flow property in capital cities. Of course, when there is a downturn, the last thing you want to be doing is having to be a forced seller. It's during these downturns that property prices are typically at their lowest, and investors can make the most money or lose the most money.

Staying on top of your cashflows

No one is going to look after your interests better than yourself. Property managers, banks, buyers agents and accountants can help but at the end of the day, you need to understand exactly where your money is going and why. First and foremost, you must keep a track of all expenses and incomes your property derives which can be easily queried, understood and actioned.

Once you have created a system (or used ours) to gather the data, you can start unpicking the details. You can work out:

1. If you are cashflow positive or negative? By how much?
2. How much you are spending on maintenance / repairs?
3. What your property manager is ACTUALLY charging you? I've been overcharged several times before.
4. What interest rates you're paying?
5. Whether your property is generating enough rent? Are rents too low? Are vacancy rates too high?
6. Is one property causing you strata issues (I've previously been burnt by special levies)?

A couple of insights that I gained when using the investment property tracker were (obviously these will vary by portfolio):

1. My high gross yield properties (6% and above), actually had significantly higher council rates, insurance, property agent fees and maintenance so my net yield wasn't as high as I expect (quite similar to my lower yielding properties)
2. My repayment buffer was very conservative. I could also handle all my properties becoming vacant for 6 months, whilst interest rates went up by 2%
3. Unit strata fees were killing my cash returns
4. My insurance for a particular property was too high - so I shopped around saved $300 or so

So as you can see, once you're on top of your cashflows, you can start to make informed and prudent decisions. This may allow you to cut back on some expenses, or give you the insight to say that you can afford to invest in your portfolio further.