Increase Your Property Portfolio by Gaining More Property
If you’re someone who’s interested in growing a property portfolio of (say) 20 properties or more, then the advice listed below will go a long way towards helping you achieve your goal.
In Australia, property investors typically own one or two properties, despite the fact that we have some really great property investment options. The reasons why investors are hesitant in expanding their portfolio include –
- They don’t trust their ability to succeed;
- They’re unsure how to manage their portfolio;
- They purchased the wrong properties;
- Their finances weren’t structured correctly;
- It all seems just too difficult;
- They think they can do it on their own.
If you’re reading this article with a view to growing your portfolio, we commend your courage, because this could well be the step that moves you into action. Education is key, and you are now starting the education process; something most investors are afraid of doing. We congratulate you on taking this very important step!
Everyone has a different starting point, and everyone has their own goals. That’s why every investment strategy should be structured differently, to suit your own personal situation. The intention behind this article is to provide you with ideas, and should not be considered as personal financial advice. When making important property investment decisions you should always speak with a trusted professional advisor.
Why Don’t Investors Buy More Properties?
How many properties do you think you could afford if each property cost you $1000 a month? The answer for most people is going to be ‘not many’; because unless you have a very large annual income to cover the costs, sooner or later you’ll run out of money.
Because most people do very little research prior to making property purchases, they end up buying properties that are costing them too much money per month, only to find out later that they’re unable to purchase more property because either the bank says ‘no’ or they’ve run out of disposable income. Another reason is that they run out of capital or equity to use for another property purchase. This happens because they gave their lender too much when they purchased their initial properties, and now they must sit tight until they’re capable of either saving extra funds or raising more capital. And so it all gets too hard.
Can these situations be avoided? Is it possible to buy more property and grow your portfolio? Yes; and we sincerely trust that the following advice will help you grow your portfolio, to not just two or three properties, but many properties!
Take your time! Be prepared with the right information to suit your own financial situation, your goals, and your risk levels. Don’t take too much time searching for the perfect property when choosing your first investment property, because there’s no such thing as the perfect property. Your first investment property will be the hardest because it is a steep learning curve and you’ll definitely be taken outside your comfort zone.
Our suggestion is that you seek the advice and guidance from professionals with different areas of expertise. Some of the experts we recommend you speak with are –
- An experienced mortgage broker;
- A qualified risk advisor;
- An experienced property consultant;
- An experienced and proactive property manager;
- A trusted accountant; and
- An experienced conveyancer solicitor.
It’s so much quicker and easier to learn from other people’s mistakes than to make your own. When you learn by your own trial and error, it costs you valuable time and money; plus, your confidence will take a real knock.
Leveraging Your Equity
Already have one or two properties in your portfolio? Then you can speed up your property growth by leveraging the equity in these properties. Using your equity is the perfect way of purchasing new property without having to put your own money into the property purchase. You won’t require a cash deposit because you’ll be borrowing funds against the equity in your existing properties.
You can only access equity in two ways –
- Selling your property; or
- Borrowing money against the equity.
Caution: Make sure you don’t overextend yourself with your loans: manage the cash flow of all loans, including equity loans.
Managing Your Cash Flow
Probably the main reason why investors don’t purchase more investment properties is that they simply can’t afford to service the repayments on their existing properties. If investors could purchase investment properties with strong income, high tax depreciation benefits, low maintenance, and high growth with each of their properties, they would be able to drastically reduce their out-of-pocket expenses and/or maintain a positive cash flow.
This is a very important tip!
Without good cash flow management, you won’t be able to afford to keep adding more properties. The only way you can grow your property portfolio is to increase your cash flow by selecting the right investment properties.
Enhance Property Values
Invest for growth in the value of your property (Capital Gains) or for cash flow; however, if you have quality properties we say why not go for both?
You’ll be surprised at what a difference the right property can make to your cash flow, particularly your after-tax cash flow. Consider looking for quality house-and-land packages with modern designs for today’s market. While building, the savings you make on government fees such as Stamp Duty and Registration of Title will completely offset the interest costs. Remember that the interest on your investment loan is tax deductible, even though there won’t be a tenant in the home until it’s completed. Also, you don’t need to use as much savings or equity because the Government Stamp Duty is much lower; leaving you with more to put towards another property. When you purchase the right investment properties they can add value and rapidly increase the speed at which you’re able to purchase more properties.
Keep a Close Eye on Your Portfolio
Always keep in mind that your portfolio can’t take care of itself. If you purchase a property and expect it to take care of itself, you’ll find the whole experience costly, frustrating, and not enjoyable at all; thus creating a barrier preventing you from moving forward and purchasing investment properties in the future.
Employ the services of a competent full-time Property Manager who understands that particular area, and who also understands that you are their client, not the tenant. Keep a watchful eye on the condition of your property and speak regularly to your Property Manager regarding maintenance and other issues that will ensure your rental income and property value continue increasing. Work closely with your Property Manager and choose your tenants wisely, ensuring they’re taking good care of your property and rental payments are made on time. Also keep a close eye on your Property Manager: if they’re costing you money or you feel that they’re inefficient, get rid of them immediately and hire a new Property Manager.
Cut Your Losses When Necessary
In the financial field this is called ‘opportunity cost’. Unfortunately, it happens all the time, where an investor purchases a poor performing property, or the wrong property for what they’re trying to achieve, and it’s a dead investment. The old saying ‘ride your winners and cut your losses’ is very appropriate here, and unfortunately many people do exactly the opposite – they ride their losses and cut their winners. Because they don’t want to admit that the property they purchased was a poor decision, or a dud property, they hold onto a bad property, accumulating losses, tying up equity, and missing out on opportunities. If this should happen to you, take immediate action on the poor decision by letting go of any property that’s not leading directly towards you achieving your goals. Re-read our first point Getting Started to get proper advice.
High Rent and High Growth
Achieving the perfect combination of high growth and strong cash-flow depends entirely on your financial position, time-frame, and risk profile. In essence, strong cash flow properties can support high growth ones: the cash flow keeps more money in your hands to service new purchases.
If your plan is to retire in (say) five years’ time on the cash flow, you may not want to risk going for poor rental income and high-growth properties; you may prefer to focus on the cash flow for your retirement. On the other hand, if you’re young and want to build your portfolio quickly while keeping your job, you may not be too stressed about chasing strong income from your investment property just yet. If this is the case, you may prefer to purchase a balanced portfolio of high-growth and strong cash-flow properties. This allows the strong cash-flow properties to support the high-growth ones, leaving more money in your pocket to service new property purchases.
Don’t Cross Collateralise
Cross collateralisation means a loan which depends on more than one property for security, meaning that there are two or more properties providing the security for one loan. The danger here is that, if something goes wrong, the bank controls all of them and you may be forced to sell multiple properties to service the loan.
If you default on a loan, in order to recover your debt, the lender will decide which property to sell. It could well be that the lender may believe your owner-occupied-home to be the easiest to sell, and they would certainly not hesitate to do so if your properties are cross-collateralised.
This situation can generally be avoided by financing each investment property independently with a different lender; which is done by accessing cash from an equity loan from one property, then using this cash as the deposit on another investment property. An experienced mortgage broker will be able to compare lender interest rates and the differences in lenders’ credit policies, which is very important for investors.
Create an Investment Strategy
Many people don’t have a long-term investment plan: they just go out and buy property and put a tenant in the home, without any thought as to what their long-term plan is. Of course they hope to make money, but they’re not really sure how the property will make money for them. It’s important to remember that not every property is a good investment, and more importantly, not every property is a good investment for you. This hit-and-miss approach might work for one or even two properties, but if you’re seriously interested in buying more property than the average investor, then you must have a good strategy; you must know how you intend to achieve this, and you must know what your end goals are.
Having an investment strategy allows you to create a list of what you expect in a property, and what you believe will work for you. This list will keep you focused, and of course buying the right investment property will become much easier. You’ll save a lot of time by not researching and running around after properties that are not suitable, you’ll make more money, and your investment portfolio will grow much quicker.
If you require further information or advice on how to structure your property investment purchase, or how to become a property investor, please feel free to contact us. We’re more than happy to help you.