OK. Day nine and we're going to be talking about where to buy.
Now, people that have budgets that are limited, which is most of us.
One of the first questions is where should I buy?
Should I buy in Timaru?
Should I buy in Hawkes Bay?
Should I buy down the road?
Well, I want to challenge the assumption that
where to buy is a location based question.
And I would say that it's a numbers based question.
So to sort of where to buy starts with understanding your borrowing power
so you can get a pre-qualification from a banker or a broker
so you can understand what you're working backwards from.
So let's say you're maximum borrowing power is $1 million.
Now, what we want to avoid, if you want to build up a portfolio is
maximizing out like you don't want to max out your leverage.
So you don't want to borrow up to one mil
when you buy your first investment property or your next investment property.
You want to go just below your means to free up borrowing power
and to make it easier for you to buy again after this one.
Because if we if we max out now then borrowing again for another property
might take years and years and years and you'll lose interest.
So what we're going to do is are going to understand the numbers,
the gross yield, net yield, cash on cash return.
So the gross yield is just simple equation
that the annual rent over the total cost.
And you can have a look below.
We'll do some example calculations.
The net yield is the profit.
So take away- you've got all of the income.
All of the expenses.
What's left over?
Cash on cash return is based on what your your cash or your equity investment
is into the deal and what return based on that cash component.
Now, the equation that
I want you to learn and to think about most is mortgage coverage.
If you're interested in building up a big portfolio of properties,
you have to understand the mortgage coverage equation and how it's evolving.
And how it impacts your borrowing.
Now, it's just simply annual rent divided by your mortgage.
And this is one of the key things that banks are looking at
to help determine whether when you buy an investment property,
the way you've got it structured and leveraged is going to be
if you can keep borrowing based on that investment property or not.
So what happens to most people is when they buy an investment property,
owning that property, the way that that is geared
in terms of how much debt is on it prevents them from borrowing again.
So a lot of people have three or four properties, but they can't keep buying
because their mortgage coverage equation is not strong enough
for the banks to lend based on that position.
So what is this in practice?
Now, most people have a mortgage coverage where their yield
based on their debt on that property is relatively low.
So an equation might be that
they're getting $500 a week of rental income.
They got $800,000 of debt.
They're getting a 3.25% mortgage coverage.
Now, what you want to think is and it might seem like an extreme scenario
now is $850 a week rent
$400K of mortgage attached to that
gets you the 11.5% mortgage coverage.
Anything above that 10, 10 and a half per
cent range, then this structure here
is actually going to allow you to borrow more money.
This one you can't.
So how can we make our mortgage coverage position a bit better?
We can put more cash into the deal which not everyone has the ability to do.
So you're not leveraging as much.
Or you can focus more on yields.
So that means buying properties probably more regionally based or more
focusing more on renovations
to improve the net net profit at the end of the day.
You've really got to understand that yield impacts borrowing power
and it impacts the ability of being able to to to keep borrowing
And so when you're deciding when you're deciding, oh, well,
where am I going to buy?
It's more of a question of
where can I buy that's going to allow me to keep buying, keep giving me the returns
that I need to feel secure with this this property investing.
No one should be saying to you,
hey buy in Christchurch, buy in Wellington, and buy this, buy this.
If somebody is specifically saying, hey, buy in this area,
it's usually because they're selling something specific.
Maybe that they've got a commission tied to it.
Once you know your borrowing power,
once you understand that mortgage coverage, deciding
where to buy should be a lot easier because you'll be able to say, okay,
for example, in Auckland,
I'm not going to get the yield that I need to build the portfolio I want
unless you're flush with cash and you can help
prevent your leverage getting too high.
So most people, normal property investors, family investors
trying to get established are probably going to have to look outside of Auckland
and they're going to really have to double down on their
their knowledge around yields and creating yields.
So buying a new build, for example, and just relying on the automatic rent
is not going to allow you to keep borrowing unless your income
is really high and you're able to keep pouring cash into those deals.
So mortgage coverage, it's a simple concept that might be new to you,
but that is going to be the first thing you think about
when you're thinking about where should I buy?
Now we're going to have a look at what to buy next.
Let us know questions in the comments.