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The Biggest Mistakes That Stop You From Growing a Property Portfolio · The Follio Property Podcast

0:00
What separates a property buyer from a portfolio builder? The market's rising, the market's rising. That makes me nervous. What's the biggest mistake you see when people are trying to build a portfolio and it stunts the growth? It's so easy to go out there and just get more debt, get more debt. Is it important for diversification across locations and asset types as well? So you don't have to sell that property under a forced situation. Is there a metric once you're building a portfolio that you should be sticking to? Investing is risk versus reward. What about accidental landlords?
0:32
You're listening to the Folio Property Podcast. I'm Rhys Bettle and I'm here each week with my co-host, Lachlan De La Hunty. If you're enjoying the podcast, do us a favor, hit like, subscribe and leave a comment so we can grow this channel.
0:47
Lachlan, what separates a property buyer from a portfolio builder? Rhys, it's having a plan and a strategy we talk about. There's a lot on the podcast and that can be just an easy throwaway, but it's actually working towards a goal. And a lot of people should start with that in mind. And the next point is understanding and constantly checking in on your personal metrics.
1:13
Yeah. And when you say personal metrics, what sort of personal metrics should people be checking in with? Debt income, cash to debt, LVR, cash buffer, those sorts of things. Yep. Okay. Let's start with debt to income. I've, you know,
1:26
Got a pretty good idea on what that would be just from hearing it, but what should someone be looking at and what is their total debt they're looking at versus their income? What sort of buffers should they be looking at? Yep, so with clients that come in, why the debt to income is so important is understanding essentially it's your serviceability level, right? So your debt to income is exactly that, how much debt you have to your income. So if I earn $200,000 a year and I've got
1:53
a million dollars of debt, my debt to income is five times. Banks will typically cut you off around six and often it's understanding what your debt to income is on your personal home versus your investment portfolio. Ideally, we don't like clients to have a higher debt to income on their personal place of residence more than three times their income.
2:13
Because otherwise, a lot of your disposable debt that you can spend on building out your portfolio has been taking up your primary place of residence. So it's really important to understand those fundamentals. And a lot of people go into this buying or home buying journey without...
2:28
those goals in mind and then they'll find themselves really stuck typically after they've overpaid for their house or spent too much on their house in comparison to their income or after they've gone out and bought to investment properties but haven't thought about other factors, other metrics. Yeah. And that's a fascinating one as well, the way you've explained it there because I think
2:46
Certain individuals will be going out there seeing they've got the capacity there, but actually once we look under the hood as per se, we'll see they're probably over-leveraged on their principal place. And a prime example actually is one of our junior sales members booked in a meeting with one of our advisors, and he actually spoke to me about this this morning, so it's quite convenient we're bringing it up.
3:07
And he was asking for feedback because it got knocked back from the debt to income and was too over leveraged. But when he'd done the initial metrics, he asked them what they're pre-approved for, what their budget was. And it all started to add up. But once the advisor actually looked under it.
3:19
they saw that all clearly overexplosing for- On their home. Exactly, on their principal place and didn't feel comfortable recommending them an investment asset as well. And then you're sort of, you're tied to that debt and we talk about it on the podcast quite a bit. It's, you almost have to take on more debt to pay off your debt quickly. So when we talk about good debt versus bad debt,
3:40
We want to take on as much investment debt as we can because, A, that's going to help us pay off that primary place of residence quicker as a debt reduction strategy. But also understand that there's an income that comes with buying an investment property because you're getting paid a rental return on that investment.
3:57
So then that actually adds to income. So if you're getting $30,000 a year of rental property and you're on $200,000, well, they'll assess your taxable income at $230,000, which in turn gives you more serviceability. So then you can increase. So it's really important that people try to keep their debt to income on their home under three. Otherwise, it doesn't leave you a lot of serviceability to start to build out that portfolio and actually start to pay off that prime place of residence debt quicker.
4:21
Yeah, so it limits your growth. It really does. And in this market when nationally it's quite hard to get in because prices are moving, people going out there and spending typically on their homes,
4:32
their first purchase, a large portion of their serviceability. And then they're sort of, they're tied to that debt often for 20 or 25 years. And you're at the mercy of your mortgage. And the only way to get out of that is wait until you've got enough equity in the asset to refinance and then use some of that capacity to buy something else. But if your income's not increasing at the same pace,
4:52
then you're going to be tied to that debt for many years before you can do anything. So really important for those going out there to buy a home, trying to keep it around or under that three times is really healthy. And I know, look, we've mentioned this. We've had a podcast specific on this topic, but we mention all the time spruikers out there and people that are probably providing misinformation to some of their clients. That feels like one that could potentially get missed if you're not talking to the right type of person who's going to properly assess someone's circumstances.
5:19
Absolutely. No one's going to care about your situation more than you. So it's important to always have a pulse check on the advice that you're getting. And this podcast is just one of many vehicles to get that information out there. What about LVRs? So it feels like it comes under a similar topic, but is there LVRs that people should be looking at or sticking to either on their principal place or once they start building out that portfolio builder?
5:43
Yeah, so LVR, so loan to value ratio, is what we're assessing here. And it depends on the asset and stage of life or stage of cycle on the investment journey where we like to see an LVR. So we've got a, you know, any one of our clients that goes through our PropStack portal, based on their age, obviously assess where they're at and where the LVR should be at for their age and their portfolio in terms of portfolio builder or debt reduction or depending on the strategy they're trying to participate in.
6:13
To answer that early in your journey of building in a portfolio, we want to take on more debt and we're more comfortable with a higher LVR and that could be, you know,
6:23
at or around that sort of 90%. When I do get concerned is when it's north of that. Why? Because you do want to have a bit of a safety buffer there. And when it's not to say you might not lend some assets, I've got assets that I've got leveraged at 107% currently, but my total portfolio is actually under 80%, but some of my investments are geared at 107%. So it's a
6:46
It's your overall pool and the reason I say that is because we always want to have a safety net because you don't know what's around the corner and that's why we talk about these metrics because you never want to get your head too far underwater. And we're seeing a bit of that at the moment, the new first-owned buyer scheme where people can now borrow it to 95%. That scares me a little, Reece, because you've got uneducated people, potentially in the market, first-time investors that haven't been around, they haven't seen cycles.
7:12
Buying in what is, you know, a very inflated market. I don't think it's overinflated, but it's an inflated market at 95%. That starts to make me a little bit nervous. Um, so what do we want to say? We want to start to understand what their cash buffers are and, you know, a lot of first time investors that come into us, I am checking that thoroughly to make sure they've got at least percent, because I want to say cash buffer, you want 10% cash to debt.
7:41
ideally for a rainy day. And this is something I don't think many investors or many property advisors are out there are probably assessing enough. Yeah, and when you say 10%, are we talking accessible cash, so offset account, maybe high interest accounts if that's the way they've got their set up or even stuff like liquidate that you could liquidate like shares or something like that? Yeah, things that can be liquidated. Ideally, 10%.
8:09
in the form of an offset, you're not going to, obviously most people are not going to have sitting there in cash because you could argue that it's wasted doing so, ideally in an offset. But you could argue that shares is a platform. But my concern there is if, you know, why do we want to have a cash buffer? It's because if there's a rainy day, if there was a,
8:26
a GFC event or if there is another war that breaks out, what's going to happen? Markets typically cool off quickly and you may lose a tenant. We want that cash buffer for a rainy day so you don't have to force sell. That's really what it's there to protect because where you lose money in property is A, not holding the property long enough to allow growth or selling in a stressed environment and then having to sell it for a serious discount.
8:49
COVID is a great example. COVID hit the next day, you took a 20 to 30% discount on that property. And those that panicked or those who lost a tenant because of that, or lost their job, or had a huge fall in the share market, therefore panicked, had to sell their property, took a loss. Those that could hold out for the next 12 months and sell it two, three, four years down the track, we're in a far better situation. So when I say cash buffer, no, I wouldn't look at the share market as a place to park it, because if there is a global event, what's gonna get hit first?
9:19
it would be something like the stock market. So ideally offset would be probably the best place to park that. And that's what we look at. 10% of your total debt is in cash for a rainy day. And those things are like, what's a rainy day? It's loss of job. It's loss of tenant. If it's commercial space, a loss of tenant could be up to 12 months in this space. You'd argue you get a tenant tomorrow. And you just don't know what's around the corner. So it's a real protection method. So you don't have to sell that property under a forced situation. Yeah.
9:49
And just going back to the LVRs that you touched on there, you mentioned with this 5% first homeowner cap scheme increasing their caps throughout each capital city. So it's really driven the volume in those markets.
10:03
hearing through other podcasts, there's agents that are seeing buyers coming in paying well over what the market value was. And in a market like Perth where it's rising, that's not too uncommon. But some of the prices that they're willing to pay, just to get above that cap and drive that price point or even if the first-time owners are taking advantage of that scheme and are at the very top of that cap,
10:29
You'd look like it's a 5% deposit, but is it really? It might be well over, 100 grand over that property. So they're actually leveraged even further above that 100% margin as well. It was the same thing when the home buying scheme kept. So the building scheme or building incentives come in when COVID hit, right? You got a $20,000 incentive from the government to build. What do builders do? They put $20,000 onto their build contracts. So we're seeing that play out in the market as we speak in it.
10:55
Again, it concerns me because it's probably our most vulnerable demographic in terms of a price point, but also experience in the market and those that don't have large deposits and potentially secure jobs, arguably. So, yeah, that does start to concern me. I'm laughing as I'm about to say this because I kind of promised you I wouldn't bring this up again, but what about accidental landlords? Oh, no.
11:15
You and your accidental landlords. Accidental landlords. You fit it in every podcast. I come across this all the time. So what about the situation where we have – we see this happen all the time with accidental landlords where they have turned their primary place into an investment.
11:32
They've done well with the market doing the heavy lifting, plus then putting extra over repayments on that mortgage over the last five, six years or whatever. And they now have their investment pop in a really low LVR and they've got into the market, their upgrade, and they're actually looking at more of a higher LVR. What's the sort of strategy when you come across those? And a lot of instances I've had clients come to me
11:53
the strategy is actually, because it's not deductible, you're actually better off selling that property rather than keeping it as an investment. Do you have those conversations regularly and what would be generic advice, obviously it's not going to be tailored, to clients that are looking to make that move? Yeah, it has to be generic because everything is situational. But first thing is to restructure. And if your upgrade is significantly higher in value, obviously there's only so much debt you can actually restructure. Property weighting, Lachlan, is there buffers for that as well in terms of,
12:23
percentage of where assets should be location-wise.
12:27
It's location and assets is really, really important. So we don't want to see, firstly, when you look at that debt, the income of three times in your home, we don't want to see the primary place of residence take up more than 50% of the capacity of the portfolio because then you're heavily leveraged to one asset, be that your home. Likewise, with asset quality and location, we don't want to see anything that's got more than 30% exposure in your total portfolio. So what would that be if you had...
12:54
six units in one particular market, say a regional market, which is quite common at the moment in, say, Townsville. You had six assets, your total portfolio. You've got eight assets in your portfolio, which six of them in Townsville. I'd be quite concerned because you're heavily weighted towards one particular market and we like to see diversification. So portfolio weighting is a critical part of what we speak to about clients.
13:20
And sorry, what percentage would you be sticking to for each asset? Is there certain asset types you could go, have your whole portfolio look the same? Or is it important for diversification across locations and asset types as well?
13:35
It is. We look at property, AAA rated suburbs, BBB, CCC, and we look at asset types as A, B, C, D. So you can look at that and say a share market, do you want to have how much exposure you want to have to A-class shares and then how many do you want on sort of penny stock, et cetera?
13:51
And obviously we want more weight in towards high quality assets, but there's still an element of the portfolio that can be more speculative. So that's why I'll never rule out any market in Australia for the right investment. Mining towns is a great example. We get asked quite frequently.
14:06
And some data points in mining towns across Australia at the moment look quite strong. But for a first, second or third time investor, certainly not giving exposure to that market. But someone with quite an established portfolio that wants 10 to 15% exposure,
14:23
into a speculative asset? Absolutely, because it's speculative. If it goes well, fantastic. If it doesn't, the whole portfolio isn't relying on that. So depending on the size of the portfolio, but that's how we start to rate them based on both location and asset type.
14:37
And like you would potentially in the share market, we want a higher density of exposure to high quality assets in high quality locations. But certainly, and that's why I'll never say no to potentially anything under the right circumstances. What about yield and growth rates? Is there a metric once you're building a portfolio that you should be sticking to? So the classic example at the moment is
15:04
Melbourne, we've got a lot of interest in Melbourne at the moment, but a lot of the properties, the yield is nowhere near as strong as some of the other markets in Australia. But the rest of their portfolio is demonstrating a good level of cash flow where they can support that lower yield. Is there an average or medium that you'd look at from an overall portfolio, from a yield perspective or a capital growth perspective as well as a follow-up question?
15:28
Yes, on the yield, again, we're trying to balance out the cash flow of their portfolio, their income, depending on what their interest rates are. Some are still locked in on quite high rates. Some are locked in on quite low rates. But there's not a blanket rule. It's really circumstantial. And that's why all these metrics that we use get plugged into the prop stack and gives us an overall percentage and a grading on where they are from a capital growth point of view as well as a cash flow point of view. Yeah.
15:52
But cash flow is so important and can't be underestimated because that's the first thing that is going to stop you from expanding your portfolio. On the growth rate side of things, absolutely understanding the market you're in and their long-term compounding growth rate is critically important because that's how we get to our location ratings. You know, A-grade assets are typically in areas that their long-term compounding growth rate is above 6.5% over the long term. And that's year on year since 1975, right? Yeah.
16:20
So the higher portion of properties in your portfolio that have that sort of grading or that term or have that long-term compounding growth rate is important. But then you look at some of the markets that may have a more speculative and don't have a longer track record and might have a lower long-term compounding growth rate but are at the bottom of the cycle. We want probably less of exposure, but it's not to say we won't have any exposure at all. So it's really just understanding the fundamentals of the market you're investing in here.
16:47
And when should someone review their portfolio in terms of- The metrics, the personal metrics, the assets. I guess the whole thing. Should they be reviewing it all at the same time? Or is there certain goals or points where they should be reviewing the metrics within a portfolio and actually the properties as well would that sit within it?
17:06
At a minimum every 12, but preferably every six months. Because things change. And the way the market's going now, it's changing rapidly. And you could be leaving opportunity off the table because you're not up to date with your annual valuation project. You're not up to date with the current VALs and you've actually got unused and underutilized equity there that you should be activating. You should be potentially increasing your rents that you weren't aware of. There's so many moving parts in a portfolio that are...
17:33
It's almost lazy leaving in every 12 months. So ideally every six, I've got clients that we meet on a quarterly basis because we're trying to just keep our finger on the pulse because the market at the moment is so dynamic. But it's also really checking in. And now more than ever in such a hot and volatile market, making sure that those personal metrics are still working.
17:55
being met. And I think that can't be underestimated because while there's so much hype and heat in the market, it's so easy to go out there and just get more debt, get more debt, get more debt, and keep running with these markets around Australia that you lose sight of your cash buffer. And all of a sudden that 15% where we're really comfortable with 20% has just slipped down to five.
18:15
And then you've bought another property, it's down to two. That's okay. The market's rising, the market's rising. That makes me nervous. And it's like, hang on, Rhys, let's cool the jets here. We've expanded the portfolio, you're doing well, but let's get this cash buffer up before we do anything else. And that's why we might catch up. Can we book a meeting for three months' time? Once that cash buffer's up to 10%, absolutely. So that's what you're going to be mindful of. And I think people lose sight of that in this phase of a market that's so hot. And that's a really good point. I think with...
18:42
The other thing I was thinking, as you were saying, all these metrics that you're looking at, it's all well and good knowing what your buffer should be. So you've kind of got a bit of a risk mitigate there. The LVRs as well is a bit of a risk mitigate. What about when do you sell? How long should you be keeping hold in the property? And should that conversation happen at the start of building a portfolio? Or should you be reviewing that in your annual process, like you said?
19:06
Yeah, ideally not selling anything. Yeah. And that's, you know, you could argue that's lazy, but we talk about this often. You only sell when there's an opportunity cost at play, and you're not going to know that unless you're reviewing your portfolio every 12 months. So, you know, there's no argument that suggests that you never sell. The old Italian way of holding property, it serves its purpose. Yes, it can be lazy depending on the assets you hold, but if you've got...
19:31
You know, perfect example, if you've got a portfolio that had an A-grade asset in every capital city of Australia, at an LVR of 50% with a really strong cash buffer, and you're at the back end of the cycle, and you're at the later part of your property investment journey,
19:47
then that scenario is fantastic. You've got full exposure to all the cap cities, really blue chip, AAA, eight grade assets. Then hold and sit back and you can weather any storm and you can ride any cycle and you're going to get the benefits of each particular rise in any market cycle. Yeah.
20:04
So to answer your question, it is very subjective and it all comes down to the opportunity cost of what assets you have in your portfolio. If you have an asset, a portfolio full of B and C grade assets, there's an argument to suggest you should be selling them all because you should be using that opportunity cost to replace that into better quality assets. You're going to produce a...
20:22
far better return, but also mitigate your risk of any downturns that could happen in a market. Because that's all, investing is risk versus reward. That's all it comes down to. And every time you invest in assets, you're using a portion of your serviceability.
20:39
You are analyzing the risk versus the reward. And we want to make sure that our clients have exposure to the best quality assets in the country with mitigating as much risk as we possibly can. And it's investing in property. You can't mitigate all risk, but the things about personal metrics, investing in high quality, high blue chip assets in high quality locations, all those things combined does give you a better opportunity.
21:03
Yeah, and I guarantee that scenario you said there where you've got A-grade assets in every capital city and they're probably not even looking at their portfolio. It's just ticking along in the background there. The people that are obviously doing the trading assets, maybe looking at all of those regional towns, they're the ones that are going to be needing regular reviews. We should be having quarterly reviews in that scenario because these markets are so volatile and in those regional areas,
21:25
If you miss the top of the cycle, you could be carrying a dud for a long period of time. Some of these markets go through a downturn for 10 years and you can't sell a dud asset. Or I'll never say, it can be difficult to sell a dud asset in a downturn. You've obviously met with hundreds, if not thousands of clients over the years. What's the biggest mistake you see when people are trying to build a portfolio and it stunts their growth?
21:50
Far too much debt on their home. Yeah. That is the most common. They've gone out early in the peace and want something to showcase, you know, and everyone's got the right to have a lovely home to bring friends and entertain, but they've gone out and spent five, six times their income on their first property, and that's their home. And then they've realized 12 months in, they can't do anything else. And then they may downsize to then activate it, but that's probably the most common. Lachlan, let's end it with an I call bullshit. We haven't done one of these in a while. Yeah.
22:18
You can't build a property portfolio without taking risks. Fact or fiction? Do you call bullshit? No, it's factual. Investing comes with inherent risk. And anyone who advise you against that, that there's no risk, there's a certain thing, is lying to you. And I think at this time in 2025, it's important more than ever that people understand that this is a serious game. It's not a game of monopoly. You're dealing with debt. You're dealing with personal savings. You're dealing with...
22:48
real life events and it's not to be fickle and yes there's podcasts and there's reels and at the moment feels like everyone's playing with monopoly money and that concerns me a little bit so there is risk so understanding your personal metrics has never been more important than it is now and what are those we spoke about them most importantly for me understand your cash buffer
23:07
understand your debt to income and make sure you understand where you're at with the LVR and keep your finger on the pulse through a time when there's going to be so much noise and hype around property investment. Understand it comes with risk. Thanks, Lachlan. You've been listening to the Folio Property Podcast.