How sophisticated property investors are thinking differently about debt
For many property investors, the early stages of their property investment strategy can feel relatively straightforward. Buy well. Hold. Allow time for the asset to grow. Access equity when it becomes available and, if borrowing capacity allows, go again.
But as a portfolio grows, the lending side of the equation can become considerably more complex – especially in today’s market.
An investor may have a strong income, significant equity and several well-performing properties, yet still reach a point where obtaining the next loan becomes difficult. Debt-to-income ratios, servicing buffers, lender exposure and changing credit policies can all begin to influence what is possible.
It raises an important question: when does getting another mortgage become a broader funding strategy?
In a special Sydney-recorded episode of The Buy-In, Gareth Croy sits down with Chris Wisbey, General Manager of Scene Finance, to explore how debt, funding, and the right property investment strategy intersect as investors become more sophisticated.
A strong portfolio doesn’t necessarily mean more borrowing capacity
One of the scenarios Chris is increasingly seeing involves investors who have already accumulated substantial property portfolios.
“They may own $5 million, $6 million or even $10 million in property. On paper, they have considerable assets and may comfortably meet their existing commitments…but that doesn’t automatically mean a lender will fund the next acquisition.”
Lenders are assessing more than an investor’s net wealth or ability to meet repayments today. Debt-to-income ratios, assessment rates, overall exposure and the lender’s own appetite for risk can all affect the outcome. For investors who have spent years following a relatively simple cycle of buying, holding and accessing equity for the next purchase, that can become a significant roadblock.
Is buy-and-hold still enough as a property investment strategy?
For decades, buy and hold has been a fundamental property investment strategy. Investors could traditionally purchase a property, benefit from growth, access some of that equity for another deposit and gradually build a larger portfolio.
That landscape has changed, and is still evolving. Higher property values, debt-to-income considerations and buffered assessment rates mean borrowing capacity may become a constraint much earlier in an investor’s journey.
It is one reason some experienced investors are beginning to consider more active ways of creating value rather than relying solely on market growth. That might include subdividing land, undertaking a small townhouse project, improving an existing asset or considering opportunities in commercial property.
The point isn’t that buy-and-hold no longer works; it’s just that the strategy is even more critical, and needs to properly address the investor’s circumstances, borrowing position, appetite for risk and ultimate objective.
Not all debt has the same job
One of the more interesting parts of Gareth and Chris’s conversation is the distinction between simply paying down debt and thinking strategically about which debt you are paying down.
For many investors, the instinct is straightforward: debt is debt, and less of it must be better. But once you own both your home and investment assets, the picture becomes more nuanced. Interest on your home loan is generally a personal expense, while interest on money borrowed for an income-producing investment may be tax deductible, subject to your individual circumstances and how the borrowed funds are used.
That is where strategies such as debt recycling enter the conversation.
At its simplest, debt recycling involves using available cash to reduce non-deductible home debt, then borrowing for an income-producing investment. Rather than simply accumulating more debt, the intention is to progressively change the composition of the debt while continuing to build investment assets.
There are important tax, lending and risk considerations, and it is a strategy that needs to be structured properly with appropriate professional advice. But for property investors, the broader principle is worth understanding even if debt recycling itself isn’t appropriate for you.
Not every dollar of debt necessarily has the same purpose, cost or consequence.
The same applies to equity. Accessing equity because it is available is not a strategy. What matters is what those borrowed funds will be used for, what they are expected to contribute to the portfolio and whether taking on that additional debt moves you closer to the outcome you are actually trying to achieve.
As portfolios become larger, these decisions become increasingly connected. Paying down debt, accessing equity, acquiring another property, creating value through development or improving cash flow cannot and should not always be considered as separate decisions.
The property strategy and the debt strategy need to make sense together.
When the lending environment changes too
Another important shift occurs when an investor starts moving beyond straightforward residential property.
Commercial property, development and other investment scenarios can operate in a different lending environment. The way an application is assessed, the information required, the lender’s appetite for a particular property or strategy and the available funding options can all change. This becomes particularly relevant for investors who have reached the limits of what they can achieve using the same approach that built the first part of their portfolio.
It doesn’t mean finding increasingly complicated ways to borrow more money. It means understanding the funding landscape before deciding what the next investment should look like.
More sophisticated doesn’t mean more complicated for the sake of it
Moving beyond a straightforward residential buy-and-hold strategy can introduce different opportunities, but it also introduces different risks.
Commercial property may provide different income characteristics to residential property, but tenant quality, vacancy periods and local demand become particularly important.
Small development can create value rather than waiting for the market to provide it, but construction costs, funding, planning, tax and execution risk all need to be understood.
Emerging property models such as co-living may suit particular markets and investors, but a compelling yield on a brochure does not replace proper due diligence. Which leads to one of the strongest points in the conversation:
If they’re selling you the dream, do your homework.
Property investment is an industry filled with participants who are paid when a transaction happens. That doesn’t inherently make the opportunity poor. But investors should understand how the people recommending, selling or facilitating an investment are incentivised.
Are they simply paid when you buy?
Will they remain involved after settlement?
Are their interests aligned with the long-term performance of the asset?
And, most importantly, does the investment make sense independently of the person selling it?
Location, demand, surrounding services, supply, tenant or buyer appetite and the suitability of the property itself still matter.
As Gareth puts it during the episode, if something sounds too good to be true, it probably is.
What comes next for your portfolio?
There is no single point at which an investor suddenly becomes “sophisticated”. But there is often a point where the strategies that helped build the first part of a portfolio are no longer enough on their own.
Borrowing capacity may tighten. Goals may change. Income requirements may become more important. An investor may begin looking beyond passive capital growth towards cash flow, value creation or different property sectors. At that stage, property selection and funding can no longer be considered in isolation.
The better question becomes: what are you trying to achieve next, and how should the property, debt and wider strategy work together to get you there?
Watch the full conversation
In this special episode of The Buy-In, Gareth Croy and Chris Wisbey unpack the lending landscape facing property investors today, including borrowing capacity, debt recycling, specialist lending, residential and commercial property, value-add strategies, small development, due diligence and what lenders are actually looking at behind the scenes. They just about scratch the surface of this huge topic but understanding how the pieces of the puzzle all fit together is key for anyone keen to create a property investment strategy that stands up in today’s market.
>> Watch: How Sophisticated Investors Structure Debt Across a Property Portfolio 🎙️
The information in this article and podcast is general in nature and does not take into account your personal circumstances, objectives or financial situation. You should seek appropriate professional advice before making financial, lending, tax or property investment decisions.
