According to Investors Forum director Daniel McEwan, it is critical to understand the rules that make property investment work.
Wednesday, February 23rd 2005, 4:01AM
by The Landlord
Fundamental to building a successful property portfolio is understanding when to invest and how it should be structured to build positive cashflow. McEwan says the first step is to understand what makes a good financial investment and whether a property should be positively or negatively geared. ``The principles of negative gearing _ investing in property that makes a loss _ have been promoted by many investment professionals. However, it is important to understand it is against all the principles of sound lending practice for any bank to lend money to a business (eg investment property) that is making a loss,'' he says.
It's relatively easy for most people to obtain one or two investment properties, as most investors have equity in their own home, other assets, investments and an income. The lending institution financing the purchase takes the home, these assets, investments and other income into account when calculating their debt:service ratio.
To obtain the finance necessary to build a large property portfolio, it is essential it consists only of properties that are making a profit.
It's important to apply the principles of full absorption accounting when investing; for example, the income stream from each investment covers all outgoing expenses and provides for the reasonable profit expectations of the investor.
Full absorption accounting is founded on seven rules that provide a platform for sound investment:
