Financial Sustainability

An investment model should have one ultimate goal, to generate sufficient revenue to continue to operate without eroding the asset base.

The major recurrent sources of finance (revenue) available to Mum and Dad investors include:
• Wages
• Rental income
• Dividend income

Other investors could list a variety of sources, such as business income, government support and annuities etc.

Investors are able to sell assets as another source of income. While this may provide cash injections (the net capital gain after fees and taxes), the investor loses the future cash flows.

An investor can also borrow, but ultimately sufficient revenue will need to be generated to meet annual interest and ultimately pay down the debt.

The relationship of investment revenues, asset spend and debt payment requires long-term financial planning. The goal should be to at least break-even, but to grow the asset base the investor has to make regular operating surpluses.

Throw into the mix the cost of maintenance of properties, which if left neglected end up costing significantly more in major repairs or may sell for under their market value to compensate the new owners for the need to complete repairs.

Failure to complete this planning may lead to a tipping point, where an investor’s portfolio of assets cost the investor more than the income generation, leading to distressed sales etc.
I am keen to hear and learn from other forum members about how they approach the long-term planning component of investing?

How does your plan inform:
• Investment mix (asset class and type of assets in the class, units vs house etc)
• Timing of purchases
• Hurdle rates for investment (what is the minimum ROI you set to proceed with an investment)

Finally how do you monitor if your portfolio is financially sustainable? What ratios or measures do you use?