Property is a stable, long-term investment that can boost your cash flow significantly. Some of the most successful property investors hold multiple properties in their portfolios, generating several cash flow streams and amplifying capital growth.
With over twenty years of experience in the property industry, here are ten tips we see being used to help grow a portfolio.
1. Assess your investment strategy and current portfolio
First and foremost, any investment property you buy needs to complement your investment strategy.
Look at how it will impact your ongoing cash flow, your future equity and how it fits into your longer-term goals. For example, if your strategy is to achieve a diversified portfolio, then purchasing multiple properties in the same area isn’t aligned with this strategy.
If the above example is similar to one of your goals, it’s important to remember that some areas give stable rental returns, with high rental yields. While other areas offer lower yields but a higher likelihood of capital growth based on supply and demand. Holding a mixture of properties in these different areas is just one way of diversifying your portfolio.
2. Leverage existing equity
Equity is gained through either capital growth or by paying down the principal of the existing loan. You can leverage the existing equity in your current investment property to buy a new one. The amount of equity you have is the property’s value minus how much you owe. The easiest way to understand how to leverage existing equity is through this simple example:
Dan purchased an investment property for $450,000 in 2015 with a 20% deposit ($90,000) and a $360,000 mortgage. This means the property’s current equity is $90,000.
Over five years, Dan pays a further $90,000 off the home loan’s principal, which means he now has $270,000 owing, plus the property’s value increase to $500,000. Dan’s equity in this property is now $230,000 ($500,000 minus $270,000). Dan can use this equity to refinance and place a deposit on a second property.
It’s important to note that financial institutions usually like owners to maintain a loan value ratio (LVR) of at least 80 per cent. So in the above example, a portion of the equity can be used if a LVR of 80 per cent is maintained.
Using a property’s existing equity can have some financial implications, such as Lender Mortgage Insurance being required on a refinanced loan. Therefore, it’s always recommended to seek professional advice before doing so.
3. Save, and save more
You can’t rely solely on your equity to build your property portfolio.
It’s important to have savings ready. One way to do this is to use the excess cash flow produced by your first investment property wisely and towards savings for another deposit. Another option is investing in safe, short-term investments that will help you grow your savings.
When considering how to use your savings, it’s important to consult with a trusted financial professional who can help you reach your financial goals.
4. Assess the current property market and cycle
You can’t predict the future. While the property market has proven resilient in recent times, the unexpected can always happen.
Keeping up-to-date with the market and property trends is important when making your next investment move. This includes not falling into the trap of being sucked into media hysteria following a bad week in the market. Ensure you’re informed by reputable sources such as CoreLogic, SQM research and government sources such as the Australian Bureau of Statistics. MyBMT is also a free, helpful tool that has a property research and insights feature.
5. Don’t let your current property plateau
Don’t ignore your current investment property as you look to grow your portfolio. This property can still be a powerhouse when it comes to boosting your returns and building your equity over time.
Get your property revalued on a regular basis and add value through a solid maintenance plan and if required, renovations. Smart renovations can help you gain equity quickly, while if the property goes up in value it can mean you have access to more equity for investing.
6. Shop around for the right loan
With interest rates at record lows, it’s important to shop around for the best loan that suits your investment strategy.
Don’t just look for the best interest rate. Each loan is different, with varying terms and conditions, so its key to do the research. Speak to your lenders and consider going through a reputable mortgage broker. A good mortgage broker can help you get the best deal and save you money in the long run.
7. Don’t rule out cheaper properties
Keeping updated with the property market means you can find hidden gems in areas with strong rental returns but lower property prices.
Buying properties in these areas mean you could potentially buy two for the price of one in a more expensive area. Another option could be selling your first investment property if it’s experienced strong growth and buy two cheaper properties with the funds.
When doing so, it’s important to consider the rental yield versus capital growth scenario, as cheaper properties sometimes experience slower capital growth. But this all comes back to your investment strategy as in the earlier years your strategy may be focussed on growth, while rental yield might become more important to fund the retirement stage of your life.
8. Consult with your property investment team
Given that you’re looking to buy more investment properties, it’s fair to assume you already have at least one that’s a success.
A professional property investment team is key to a successful investment property, and consulting with them can provide you with both guidance and a solid plan of attack. Your team could include your accountant, financial planner, property manager, real estate agent and specialist quantity surveyor.
9. Consider joint ventures
Pairing up with someone with similar investment goals as you can be a more affordable option to add to your portfolio.
Not only does it mean your upfront costs are less, the ongoing costs of owning an investment property are reduced to make it more financially viable in the longer-term.
10. Contact a tax depreciation specialist
Property depreciation is the second largest tax deduction, after costly interest repayment. This means claiming the most depreciation deductions can boost your properties cash flow by thousands of dollars each year.
BMT Tax Depreciation can provide you with an obligation-free tax depreciation quote on any property you’re considering adding to your portfolio. Plus, BMT’s free PropCalc tool can show you the real cost of owning any residential property in Australia.
To learn more, contact BMT on 1300 728 726 or Request a Quote.