What’s going on guys Its Jordan de Jong here and today I want to talk about why you can’t buy infinite cash-flow positive properties, although that may be common sense for some, it’s a question I get asked a lot when it comes to buying for capital growth or passive income properties. I’ll also admit, when I was a young aspirational property investor I would literally stay awake all night being so excited by this concept, I think for most when the penny drops that you can make passive income off the rental on an investment property that dream of having 20 properties paying you $100 a week feels like it can become a reality. But it often doesn’t stop here, when you think about only having 20, why not 40? 50? Or 100? And this is what really excites people, being paid for nothing, “making money while you sleep” off the rental income from your investment properties, we’ll my dreams got shot down by my mortgage broker after a couple of conversations with him, but it’s not the end of the world, there are still plenty examples of people who have amassed huge cash flow positive property portfolios, I’ll go into detail about at the end of this blog. I’m not going to go down my back story of how I got so inspired, because I’ve already talked about it in detail in some of my previous blog, long story short, there where old books, methods, and even property spruikers that use to sell the dream of multi passive income property portfolios. From the outside in, I use to think about it this way, if I can afford 1 $500,000 house, that’s paying for itself plus bring in extra income, then as soon as I have another deposit I could buy another $500,000 house that also pays for itself and brings in even more money, then I would just repeat this process until all of that extra income from multiple properties stacks up to be enough for a full-time wage that I could live off. This is where the BRRR strategy also differs a little here, BRRR stands Buy Renovate Rent Re-finance and then if your feeling really cold, you can add another R for repeat, essentially this strategy uses multiple elements to manufacture equity, increase cash flow and then go again as soon as possible. I’ll do another blog purely dedicated to my thoughts on that strategy so make sure you sign up and hit the notification bell so you don’t miss it! So back onto the unlimited properties scenario, essentially, as long as I purchased cashflow positive properties that were paying for themselves, plus having the wage from my job then surely I could continue to buy infinite properties until I was able to comfortably live off the passive income. Now I wasn’t necessarily wrong, there use to be ways to do this in a less digital world, but because we have to disclose everything on our financial statements and with open banking, there’s no possible way to hide your transaction history we can’t set up some form of multiple trust entity structure to hide our big debts behind. And yes, although it doesn’t seem like it, our banks only have a certain risk appetite, they will only allow you to borrow so much before they deem you close to or above their risk threshold, obviously, this comes down to individual circumstances but over the last 5 years, it has generally sat around 6 to 8 times your income. This borrowing capacity calculation also differs between lenders and often you will find that second or third tear lenders are a little more flexible with how much you can borrow. So, for an individual earning $80,000 a year, their borrowing capacity would be somewhere around $480,000 - $640,000 depending on their spending habits, of course, now this doesn’t leave much leeway if your planning on buying multiple properties, especially around that $500,000 mark. Some do get caught up here if they are talking to the wrong people or less informed about what makes a good investment property, there are some great cash-flow positive deals out there, especially at the lower end of the spectrum around $200 - $400 thousand dollars, these properties tend to have higher rental incomes compared to their price, which is also known as the rental yield. Analyzing a property just based on rental yield is an easy way to get trapped, what if you tenant leaves and you can get a new one for 3 months? Although this is a very rare scenario, it can happen and now the passive income dream has just been thrown out the window and you are fully liable to cover all costs until you find a new one. This is why it’s essential to take everything into consideration before buying an investment property, or even your principal place of residence for that matter, this is the biggest financial decision you’ll ever make in your life, and if market conditions impacted your cashflow and forced you to sell at the wrong time, it could be a very costly financial decision. Some people in our industry now talk about this concept called unicorn properties, where essentially, you analyze data on the property at a snapshot in time instead of taking an multiple decade analysis approaches, If you want to learn some of the basics of what makes an A-Grade investment property or what these unicorn properties actually mean, I’ve made a whole series dedicated to just that. So back to young inspiration Jordan, my way of thinking was if a property was covering all its costs and bringing in passive income, surely that additional passive income and plus my entire wage could service another whole mortgage, or in other words, a bank would lend me a whole other loan to buy the next property. But in reality, If a property was bringing in say an additional $100 a week or $5,000 a year, you still have to pay tax and expenses out of that and as discussed before, say your tenant left and it was vacant for a month, again it would chip down the $5,000, so best case scenario let’s say the property brings In a net total of $2,000 PA. And that’s all you get, an additional $2,000 that lenders would include into your borrowing capacity calculations, times this by our 6-8 times income scenario and we would only be allowed to borrow an additional $12,000 - $16,000 on top of what we can currently borrow. Now I might just be preaching to quire here, but this took me some time to fully process In my head, I could stack the numbers up over and over and see that I still had large income buffers and safety nets for the worst-case scenarios, but essentially it doesn’t matter what your risk profile is, it comes down to the banks risk profile. There are some serious case studies out there, like Nathan Birch, he's a prime example, I think it has somewhere between 160-200 properties in his portfolio, and he is one of the very lucky few who were able to use the old methods to borrow effectively limitless money pre- and during the GFC. I’m still a massive fan of Nathan and aspire to everything he has achieved, but as he regularly talks about now, he is moving into other asset classes such as gold and crypto because he finds it difficult to borrow more money in the current lending environment. On top of this, I’ve just interviewed Eddie Dilleen for my podcast Smashed Avo Property, he’s 28 years old with 16 properties, and he talks in detail about the complications with getting more finance with that amount of properties, still achievable, just a lot more work to get all the paperwork in order. I’ll leave a link up here when the episode comes out. At the end of the day, high cash flow properties aren’t a complete no go, they are still essential for balancing out a large portfolio, they help significantly when going through the debt reduction phase and a lot of investors chase them when heading into their retirement phase of life. But for me personally, while I’m still in the acquisition phase I would never substitute out capital growth for a high rental yield, 60 years of compounding capital growth will far outpace $2,000 of net income over the same period, as long I know I can afford to hold that capital growth property until it turns into a passive income property. And I think this is a better play, buy A-Grade investment properties and let them become positively geared over time, and this can be done in many ways, one is to pay down the debt in an offset account until eventually the interest repayments and other outgoing expenses are less than the rent coming in. Another is to sit and wait it out for the long term, over time the rental income should increase on your property, usually around 2.5% PA and even if your mortgage and interest repayments didn’t move at all, eventually, your rental income will grow large enough to cover all the costs, depending on the numbers when you purchase the property, this usually happens between year 7 and year 18. The final way is to take advantage of economic conditions, right now we are in a really low-interest environment, which means it costs less to borrow money, so maybe by re-financing and trying to get on a lower rate, you could significantly decrease the amount you are paying in interest, which means you could put more in the offset every month and fast track the debt reduction process. As always, seek your own professional financial, legal, taxation & property investment advice for your current situation, these blogs are just my opinion and general in nature and should never be considered personal advice. Until next time, happy house hunting.

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