Buying multiple investment properties and growing a large property portfolio is something that few Australians ever achieve. But for those who do buy multiple investment properties, they find themselves substantially better off than the rest of the population. Owning a large portfolio of properties means you get to take advantage of capital growth across a variety of assets, and you get to use the power of leverage to grow a small investment into a substantial one. It is very difficult to achieve financial freedom off just one investment property, but once you own multiple investment properties, financial freedom becomes extremely achievable.
Investing in property is one of the top ways Australians choose to build their wealth. Residential investments in Australia account for 35% of all housing finance. However, building a sizable property investment portfolio does not happen overnight. If you aim to own more than one property, then these five tips will get you started on climbing the property ladder.
Buy below market value
There is an old saying that says “you make your money when you buy”. For most investors, this isn’t true because they are buying a property at market value and simply crossing their fingers, hoping for the market to go up. By doing your research, you can locate properties all over Australia, which you can buy for under market value. Maybe the property has been on the market too long, or maybe the seller needs some quick cash for personal reasons. But every now and then properties sell well below their market value. It takes a lot of research, and you might have to make 100 low ball offers before you get one accepted. But if you can buy below market value, you have instant equity which you can then use to reinvest and buy even more investment properties.
Add value through renovation
Renovation can be a great way to add value to a property and gain equity quickly. Most people shop with their emotions, not with their imaginations. Very few people look at a run-down property and see its potential. Thus run-down properties often fetch for well below the market value of similar well kept properties because people don’t want to put in the work to bring them up to speed. If you are willing to put in the effort and you are smart with your renovations (avoid homes in need of a lot of structural work), you could add a great deal of equity to your property fairly quickly.
Buy at the right time in the property cycle
Many investors like to refer to “The property clock”. When they are talking about the property clock, they are talking about the difference between a market that is declining and a market that is booming. By purchasing a property in a market that has hit bottom and seems to be rising, you can take advantage of quick capital gains on the property. However, if you get swept away and end up buying a property at the height of the boom, you could find yourself waiting years and years before the property is worth even what you paid for it. As you are likely going to need to borrow against equity gained in your properties to continue investing, you probably don’t want to buy a property that isn’t going to grow in value within a short-medium time frame. Buy incorrectly, and you will run out of equity, and you won’t be able to invest any further.
Constantly get property values reviewed
A lot of investors who own just one property fail to get their property revalued. If your property has gone up in value, it is probably worth paying to get a valuation done. If the property has a higher valuation than previously, this means you now have access to more equity for investing. Property valuations do cost money, but they are often tax-deductible. If the market is booming and you believe your property has gone up in value, why not get it reevaluated?
Do not cross-collateralise
Many professional investors warn against cross-collateralisation. This is where you secure your loan against two or more properties instead of just the one property. If you have two loans with one bank, it is highly likely that your loans are cross-collateralised by default. The only real way to avoid this is to use a new lender for every single property you purchase. The reason this is dangerous is two-fold: A) If your property falls in the value they can force you to sell multiple properties (often your home) to pay off the debt B) If you sell your property to access the capital gains the lender may (without consulting you) use some of the profits to pay down your debt on other loans. This means the money you would have had to invest has now automatically gone to paying down a mortgage. Cross-collateralization can put the brakes on a growing property portfolio by not allowing you to use your money as you see fit.
Get a great mortgage broker
Obtaining finance is much harder than it was ten years ago, and it isn’t about to get much easier. Having a great mortgage broker will help you to maximise your borrowing capacity. It will allow you to get approved for more (and better) loans, allowing you to grow your portfolio faster. As you become a serious property investor, it may be worth creating a relationship with the banks. However, in the early days, it is almost always better to work closely with a trusted mortgage broker.
Get good at researching the market
If you are buying multiple investment properties, you probably aren’t going to want to buy every single property in your street. You are probably going to want to invest in different suburbs and maybe even different states. It is important that you train yourself how to analyse and research a suburb or town effectively, so you know what to look out for. You want to avoid getting stung by buying in the wrong area.
Keep abreast of trends and changes
Governments are constantly changing and updating laws and taxation, and this can have huge implications on your property investments. Stay abreast of changes that affect property investing as a whole (e.g. Interest rate changes, taxation changes) and also changes that affect the areas you are invested in (council upgrades, bypasses etc.) For example, if you own a property in a mining town and the government does a huge land release in the area this is going to affect supply and demand drastically and could lower the value of your property.
Create positive cash flow where possible
Positive cash flow occurs when your investment income (usually rental income) is greater than the sum of all your expenses. If every property you buy is putting extra cash flow into your pocket, then you can afford to service these properties and continue expanding. But suppose every property takes money out of your pocket every week because it is negatively geared. In that case, you will soon find yourself without enough money to keep the properties afloat, let alone keep investing. By having positive cash flow properties, you are free to reinvest the extra cash flow, or you can use it to fund the increased expenses that come with obtaining equity loans to buy more properties.
Take great care of your tenants
Your tenants are your #1 asset so take great care of them. Without tenants paying you to rent every week, it is highly likely that your property portfolio will come crashing to the ground. I am not advising you never to increase rents (truthfully I think steadily increasing rents is a wise investment decision for many investors), but I am saying to take good care of your tenants. When they ask for something to be fixed, it is generally not a bad idea to get on it straight away. If you have tenants that pay on time all the time, why not find ways to surprise them and make them love their landlord. Some free movie tickets or a free bottle of wine go a long way to keeping happy tenants happy.
Don’t make emotional decisions
Most people purchase property emotionally. They love the look or the feel of the property, and thus they are emotionally motivated to pay more than what the property is worth. By keeping a level head and always doing the numbers, you can avoid these emotional decisions and can continue to buy properties below market value or at least properties with solid growth potential. One of the last things you want as an investor is to buy a property because you liked the look of it only to find out it is consistently losing you money with no hope of making it back any time soon.
Make lots of offers
Don’t be afraid to make a lot of offers on properties. You might have to make 100 offers to get one seller to accept an offer that you are happy with. But that is better than making very few offers and paying a great deal more than what you should have paid for the property. If you are going to present a low-ball offer always try to justify the price. Talk about the need for renovation or the structural concerns or the state of the suburb. By justifying your offer, it is more likely to be considered and won’t simply offend the seller.
Take advantage of 95% loans if viable
If it’s viable for you consider paying Lender’s Mortgage Insurance to get a 95% loan. This allows you to invest with a smaller deposit and stretch more money further. It could mean the difference between you buying one more investment property or being stuck with the portfolio you currently have without being able to grow.
Keep interest-only loans
Many professionals advise investors to use interest-only loans. The rationale is that they maximise tax deductions by keeping your interest repayments at the same amount and they maximise cash flow because you aren’t using cash flow to pay down your mortgage. The cash flow benefit could mean the difference between a positive cash flow property and a negatively geared property, and it could improve your serviceability with the lenders as well.
Sell To Expand
Buying multiple investment properties doesn’t mean you have to buy properties and never sell them. Sometimes it makes sense to sell an underperforming property, realises the capital growth and equity and uses that money to reinvest in another property (or two) that are likely to perform better. Don’t get stuck with a dud hoping that one day it will be worth more money if the negative signs are there consider selling it and use the money to buy something with a better rate of return.
Determine Your Level of Involvement
Some people make a career out of renting properties. They might own hundreds of properties, have several full-time paid employees, and work on the business 40 hours a week – or more. Others are more low-key. They may simply renovate a basement apartment in the home they live in and rent that out.
Where do you fall on this spectrum? Do you want to be very involved in the process of being a landlord, or do you just want to earn a bit of money on the side? If you want to hold onto your current job while still having multiple properties, you might want to get a management company involved. You will have to pay out some of the profits, but you won’t have as many headaches.
Financing Multiple Homes
Perhaps the biggest challenge when you’re trying to buy multiple investment properties is financing all of those purchases. While you can usually get your first mortgage with only a 5 per cent down payment, banks typically require you to have at least 20 per cent as a down payment on any additional homes you purchase. Furthermore, you may start to have problems getting approved once you start looking to buy your seventh or eighth home.
How can you make all of this work? First of all, it’s important to avoid over-extending yourself. Falling behind on mortgage payments will make it all but impossible to get financing again. It’s also a good idea to use your capital to buy homes outright if you can. Instead of putting a 20 per cent down payment on a $500,000 home, consider purchasing a townhome that only costs $300,000. You’re paying more upfront, but when you have the capital, a property like this will make you thousands in pure profit from the day your tenants move in, accumulated year after year, while it appreciates in value at the same time.
The exception to this will be if that $500,000 home is a multi-unit property that will earn you a significant amount of money. Then it could be worth you mortgaging the home knowing you’ll be making a higher profit margin to put towards the principal and fund new properties.
Choose Homes that People Want to Rent
The key to earning money with your rental properties is making sure that you always have someone renting them. To do this, you need to select the homes you purchase carefully. A home that will sit on the rental market is not a good deal, no matter how great the price is.
Focus on things like the location of the home. Is it in a good neighbourhood? Is it relatively close to the city? Are there grocery stores and other amenities nearby? If so, you could have a winner. Think also about the types of people you’ll rent to. If you’re looking at young professionals who might have roommates, then you may want to look at properties that have multiple bedroom suites. If you’re looking to rent to families, you should look for homes with big backyards and a playground nearby.
Actively Manage Your Portfolio
Most Australians take a ‘set and forget’ approach to their investing. They do this for their super, and they also do this for their property portfolio.
By actively tracking your property portfolio’s performance and by looking for ways to improve its performance, you will dramatically increase your chances of buying and being able to afford multiple real estate investments.
Don’t Quit Your Day Job
The goal for most people when buying multiple properties is to achieve financial freedom. However, this doesn’t happen instantly, and if you quit your job too early, you may find it difficult to expand your portfolio.
If you quit your day job early, you will lose your steady and secure income stream, and lenders may refuse to lend to you because they believe you cannot support the repayments that the loan requires.
Quit your day job once you achieve financial freedom or once you establish yourself with your lenders so that they agree to lend to you based on the performance of your portfolio, not because of the income of your job.
Can I truly afford it?
Owning multiple properties can bring strong returns, but it is also a massive financial burden in the short term. In reality, unless you have plenty of cold, hard cash on hand, having more than one property when you still have outstanding loans from your first house will eat into your savings.
Under the current banking regulation in Singapore, everyone is subjected to the Total Debt Servicing Ratio (TDSR) framework, which means loan obligations cannot exceed 60 per cent of one’s gross monthly income. If you already have an existing loan from your first property, the percentage will be lowered depending on how much you have previously borrowed.
Here’s where it gets complicated: you can only borrow up to 50 per cent of the purchase price or market valuation (whichever is lower) of your second property, on the condition that the loan tenure does not exceed 30 years and that the sum of loan tenure and the age of the borrower at the time of application does not extend beyond the retirement age of 65 years.
In addition, you need to pay the first 25 per cent strictly by cash, while you can choose to pay either by cash or CPF for the next 25 per cent. Take note though that you can only use your CPF to make payment after you have set aside S$77,500, which is half of the prevailing CPF minimum sum in your CPF Ordinary Account and Special Account (the other half can be in the form of a pledge from a property purchased with CPF savings).
In short, you will need to make a minimum cash payment of S$250,000 for a property priced at S$1 million!
That is not all. Most buyers choose to lease out their second property to offset the mortgage, which means you will need to charge rent equivalent to your monthly housing loan payment. This may be an issue if your monthly payment is higher than the existing rate for rental homes in your area, which frankly, does occur in today’s context.
Another question you have to ask yourself is that in the worst-case scenario if you do fail to rent out the property even after you lower rent, will you still be able to pay the monthly mortgage on your own for at least one to two years?
Ultimately, owning property boils down to proper financial planning and a good intuition for investment. It is possible to hedge on the property to grow your assets, but it does come with serious thought about the costs that will entail.