Few Australians realize the goal of purchasing many investment properties and building a significant property portfolio. Those that do buy many investment houses, on the other hand, find themselves significantly better off than the rest of the population. Owning a big portfolio of properties allows you to benefit from capital growth across a wide range of assets, as well as employ the power of leverage to turn a small investment into a substantial one. Financial freedom is incredibly tough to acquire with only one investment property, but with many investment properties, financial freedom becomes extremely achievable.
One of the most common and well-liked ways for people in Australia to amass wealth is through the purchase of investment property. 35% of the entire amount of housing finance in Australia is accounted for by residential investments. On the other hand, accumulating a sizeable portfolio of real estate investments does not happen overnight. These five tips will get you started in the right direction if you have your sights set on owning more than one piece of real estate.
Would you like to speak to a specialist? Book a complimentary discovery session by calling: (03)999 81940 or emailing team@klearpicture.com.au.
Purchase at a discount
The classic proverb states that "you make your money when you purchase," and this is true. Since most investors purchase real estate at its current market price and then simply cross their fingers and hope that prices will continue to grow, they do not believe this to be true. If you do your research, you can uncover homes all around Australia that are listed for less than their current market value. It's possible that the house has been on the market for an excessive amount of time, or that the seller needs cash quickly for personal reasons. However, properties are sold sometimes for significantly less than their market worth. It takes time and effort to conduct research, and you may have to make 100 low-ball offers before one is approved. However, if you can acquire below market value, you will have quick equity that you can utilize to reinvest in new investment properties.
Increase value by remodelling
The value of a home can be increased and equity can be gained more quickly through the use of renovation as an effective technique. The majority of shoppers are guided more by their feelings than their imaginations while making purchases. Very few people are aware of the opportunities that lie within a run-down property. Because individuals do not willing to put in the effort to bring run-down properties up to speed, they typically sell for a price that is far lower than the market value of comparable well-kept properties. This is because the market value of well-kept properties is higher. It is possible to quickly add a considerable amount of equity to your house if you are willing to put in the effort and if you make smart decisions regarding the upgrades you make (avoid purchasing homes that require extensive structural repair).
When is the best time to buy in the property cycle?
Many property investors refer to "The property clock." When they talk about the property clock, they are referring to the difference between a declining market and a growing one. You can take advantage of quick capital gains on a property by purchasing it in a market that has hit bottom and appears to be rising. On the other hand, if you let yourself get carried away and buy a house at the height of the boom, you might have to wait many years and years before the home is even worth what you paid for it. Because it is highly likely that you will need to take out a loan against the equity you have built up in your properties in order to finance further investments, you should avoid purchasing real estate that is unlikely to appreciate in value within a short to medium amount of time. If you make poor purchases, you will deplete your equity and be unable to make additional investments.
Get property values checked on a regular basis
Many investors who simply own one piece of real estate choose not to get that property revalued. If the value of your home has improved over the past year, it is highly recommended that you get it professionally appraised. If the current value of the property is larger than its former value, then you have increased equity with which to make investments. Although they are not inexpensive, property valuations are typically deductible from taxable income. Why not have a new appraisal of your property if the real estate market is doing well and you believe it's worth more now than it was before?
Avoid cross-collateralising
Cross-collateralisation is strongly discouraged by many experienced investors. When you do this, rather than just putting up one property as collateral for your loan, you put up two or more. If you have two loans with the same bank, both of those loans will almost certainly be cross-collateralized because that is the default setting. The only way to get around this is to get financing from a separate lender for each of your purchases of a home. There are two reasons why this is problematic: A) If the value of your property drops, they may require you to sell multiple properties, the most important of which is likely your home, in order to pay off the debt. B) If you sell your property in order to access the capital gains, the lender may use some of the earnings to pay down your debt on other loans without contacting you beforehand. This is the case even if you sell the property in order to access the capital gains. This suggests that the money you would have needed to invest is instead going towards paying off a mortgage or another debt of some kind. Cross-collateralization restricts your ability to spend your money as you see appropriate, which might stunt the growth of your real estate investment portfolio.
Find an excellent mortgage broker
The process of obtaining financing is currently significantly more challenging than it was ten years ago, and there is little hope that this will change in the near future. You might increase the amount that you are able to borrow with the assistance of a qualified mortgage broker. You will be able to acquire more loans, some of which will be of a higher quality, which will make it possible for you to rapidly grow your portfolio. As you develop into a more serious real estate investor, it may be beneficial to cultivate a relationship with the financial institutions that you deal with. However, in the early stages, it is almost always best to work closely with a professional mortgage broker. This is especially true in the event that there are complications.
Improve your market research skills
You probably won't want to buy every single house on your street if you're buying many investment properties. You will most likely want to invest in other suburbs and possibly even different states. It is critical that you learn how to thoroughly analyze and investigate a suburb or town so that you know what to look for. You don't want to get stung by buying in the wrong neighbourhood.
Keep up with trends and changes
Regulations and taxation are subject to continuous modification and updating by government agencies, which can have a substantial influence on the value of your real estate holdings. Maintain a current awareness of changes that effect real estate investing in general (such as shifts in interest rates and taxation) in addition to changes that affect the geographic areas in which you have invested real estate (council upgrades, bypasses etc.) If you own property in a mining town, for instance, and the government decides to carry out a sizable land release in the region, supply and demand may be significantly impacted, which could ultimately result in a decrease in the value of your property.
Whenever possible, create positive cash flow
When your investment income (typically rental income) exceeds your total expenses, you have positive cash flow. If every property you buy generates more cash flow for you, you can afford to service these properties and keep expanding. But assume every property costs you money every week because it is negatively geared. In that situation, you will quickly run out of funds to keep the properties afloat, let alone continue investing. You can reinvest the excess cash flow from positive cash flow properties, or you can utilize it to cover the increased expenses that come with securing equity loans to buy other properties.
Take excellent care of your tenants
Because they are your most precious asset, tenants deserve the utmost care and attention from you. If you do not have renters who pay you on a weekly basis, your property portfolio is highly likely going to fail if you do not have renters. I'm not suggesting that you increase your rents—in fact, I think that maintaining steadily increasing rents is a fantastic financial option for many landlords—but I am suggesting that you provide excellent tenant care. When they ask for anything to be fixed, you should normally start working on it as soon as they make the request. Why not take your tenants that have a perfect payment history by surprise and show them how much you appreciate them being your tenant? A few complimentary movie tickets or a bottle of wine might go a long way towards ensuring that tenants are content with their living arrangements.
Make no irrational choices
The majority of people make their real estate purchases based on their feelings. Because they enjoy the appearance or the atmosphere of the property, they feel an emotional compulsion to pay more for it than it is actually worth. By keeping a level head and always performing the math, you may steer clear of making decisions influenced by your emotions. This will allow you to continue purchasing real estate at prices that are below the current market value or that have tremendous growth potential. As an investor, one of the things you want to avoid doing as much as possible is making the mistake of purchasing a piece of real estate solely on the basis of how much you liked its appearance, only to later learn that the property is consistently losing money and has a slim chance of ever making it back.
Make a lot of offers
Do not be afraid to place multiple bids on a piece of real estate. It is possible that you will have to place one hundred bids before a seller finally agrees to a price that is reasonable. However, this is preferable to putting very few offers on the house and then spending a significant amount more than you should have for it. If you make a low offer, you should always make an effort to justify the price. The requirement of renovation, structural problems, and the current situation of the suburb should all be discussed. You can raise the likelihood that your offer will be accepted and reduce the risk that it will only enrage the seller by providing justification for it.
If possible, take advantage of 95 percent loans
If you can afford it, consider paying Lender's Mortgage Insurance to obtain a 95 percent loan. This allows you to invest with lesser initial investment and stretch your money further. It could mean the difference between purchasing another investment property and remaining with your current portfolio without the ability to grow.
Maintain interest-only loans
The use of interest-only loans is recommended to investors by a number of professionals in the financial industry. The reasoning for this strategy is that it maximises tax deductions by maintaining the same level of interest payments, and it maximises cash flow by avoiding the use of cash flow to reduce the principal balance on the mortgage. The cash flow benefit may increase your lender serviceability as well as the property's ability to generate positive cash flow, potentially making the difference between a negatively geared property and a positively geared property.
Sell in order to grow
It is not true that just because you buy a lot of investment properties you have to hold on to all of them forever. It is possible that selling a property that is not performing well, realising the capital growth and equity, and reinvesting the funds in another property (or two properties) that are anticipated to perform better may be the best course of action. Do not buy a piece of junk in the vain expectation that it will increase in value at some point in the future. If the warning signs are there, you might want to think about selling it and investing the money in something that offers a better rate of return on your investment.
Determine Your Level of Involvement
Renting out homes may be a profitable line of work for some people. They may own hundreds of properties, employ numerous full-time staff, and work on the business for 40 hours each week - or more. Others are more reserved. They might simply refurbish a basement apartment in their home and rent it out.
Which end of the spectrum do you fall on? Do you want to be heavily involved in the process of becoming a landlord, or do you just want to make some extra money? If you want to keep your existing employment while still owning many properties, you may consider hiring a management business. You will have to give some of your profits away, but you will not have as many headaches.
Multiple Home Financing
The most difficult problem when trying to buy many investment properties is financing them all. While you may normally receive your first mortgage with only a 5% down payment, banks usually want as least a 20% down payment on any additional residences you buy. Furthermore, once you start shopping for your seventh or eighth property, you may have difficulty being accepted.
How are you going to make all of this work? First and foremost, it is critical to avoid overextending yourself. If you fall behind on your mortgage payments, it will be nearly impossible to obtain new financing. It's also a good idea to use your funds to purchase residences altogether if you have the means. Instead of putting down 20% on a $500,000 property, consider purchasing a townhome for $300,000 instead. You spend more upfront, but if you have the funds, a property like this will bring you thousands of dollars in pure profit from the day your tenants move in, compounded year after year, while also increasing in value.
The only exception to this is if your $500,000 home is a multi-unit property that will generate a lot of money.
Select properties that people want to rent
The key to making money from your rental properties is to always have someone renting them. To accomplish this, you must carefully select the residences you acquire. A home that will be rented out is not a wise buy, no matter how low the price.
Consider things like the home's location. Is it in a decent location? Is it a short distance from the city? Is there a grocery shop or other conveniences nearby? If so, you might have a winner on your hands. Consider the types of folks you'll rent to. If you're seeking for young professionals who may have roommates, consider properties with multiple bedroom suites. If you want to rent to families, look for properties with large backyards and a playground nearby.
Manage Your Portfolio Actively
The majority of Australians invest in an asset and forget about it. They do this for their super as well as their property portfolio.
By continuously tracking the performance of your property portfolio and looking for methods to improve it, you will significantly raise your prospects of purchasing and affording several real estate investments.
Don't Give Up Your Day Job
Most people want to obtain financial freedom when they buy numerous houses. This, however, does not happen overnight, and if you quit your job too soon, you may find it difficult to build your portfolio.
If you stop your day job too soon, you will lose your consistent and secure income stream, and lenders may refuse to lend to you because they fear you will be unable to make the loan instalments.
Quit your day job if you have achieved financial independence or have established yourself with your lenders so that they would lend to you based on the success of your portfolio rather than the income from your employment.
Would you like to speak to a specialist? Book a complimentary discovery session by calling: (03)999 81940 or emailing team@klearpicture.com.au.
Is it actually affordable for me?
Owning numerous homes can provide excellent returns, but it can also be a significant financial strain in the near term. In truth, possessing more than one property while still having outstanding loans from your first house will eat into your savings unless you have a lot of cold, hard cash on hand.
Under current Singapore banking regulations, everyone is subject to the Total Debt Servicing Ratio (TDSR) framework, which states that loan commitments cannot exceed 60% of one's total monthly income. If you already have debt from your first property, the percentage will be reduced based on how much you have borrowed previously.
The catch is that you can only borrow up to 50% of the property's purchase price or market valuation (whichever is less) as long as the loan term does not exceed 30 years and the total of the loan term and the borrower's age at the time of application does not exceed 65 years.
In addition, the first 25% of the total must be paid in cash, while the remaining 25% can be paid in cash or CPF, whichever you like. Be aware, however, that the only time you will be able to use your CPF to make a payment is when you have saved up S$77,500 in both your CPF ordinary account and your CPF special account. This is half of the current minimum value that is necessary to contribute to a CPF account (the other half can be in the form of a pledge from a property purchased with CPF savings).
In short, a minimum cash payment of S$250,000 is required for a S$1 million property!
Not only that, but most buyers choose to lease out their second property to help pay off their mortgage, which means you'll have to charge rent equal to your monthly mortgage payment. This could be an issue if your monthly payment is more than the current rate for rental properties in your area, which, to be honest, happens in today's market.
Another topic to consider is whether, in the worst-case situation, if you are unable to rent out the house even after lowering the rent, you will be able to pay the monthly mortgage on your own for at least one to two years.
Finally, owning property comes down to proper financial planning and a sound investment intuition. It is feasible to hedge on property in order to build your assets, but doing so requires careful consideration of the fees involved.