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If you want to learn how to buy more property then this post is written for you. If you want to turn a property portfolio of maybe 1 or 2 properties into a portfolio of 30 or 40 properties then the tips contained within this post will help you get there (plus 15 more tips here).
The huge majority of property investors in Australia own only 1 or 2 properties. One of the reasons these investors don’t expand into more property is that they don’t know how to manage their portfolio the way I am going to show you.
Firstly let me congratulate you. Today you have sought out this article in one way or another because you are interested in growing your investment portfolio. You are doing what the majority of investors don’t do, you are educating yourself! So congratulations for taking that extremely important step.
Everyone is different and thus every investment strategy should be different. This article is written as an overview to give you ideas, it should not be taken as individual financial advice. Always seek a professional financial advisor before making serious investment decisions.
Firstly let’s address a major concern:
Why Don’t Investors Buy More Than 3 Investment Properties?
Let me answer this question with a question:
“How many properties could you afford to own if they each cost you $1,000/month?”
Unless you are earning over $200,000/year the correct (and scientific) answer is:
Why? Because you only have so much disposable income that you can spend on property.
Most people buy properties that cost them money each month thus they cannot afford to buy more property because they quickly run out of disposable income.
So now let’s answer the more important question:
How Can You Buy More Property And Grow Your Portfolio?
I sincerely hope that the following 10 ideas will help you to own not only 3 properties but 300 properties, and that your income can go up and up and up and up over time.
1. Take The First Step
Buying your first property is the most important step you will ever take to building your property portfolio. Almost all successful investors have said that the first property is the hardest and that it gets easier from there.
Take your time when choosing your first property but don’t take too much time. The first property is your initiation into the world of property investing and it will be a steep learning curve.
The chances are you aren’t going to hit the nail on the head for your first property and buy a winner, but you don’t want to lose a whole bunch of money either. Start with smaller deals and cheaper properties to get your bearings, then move onto larger deals as you become more equipped in property investing.
Generally it helps to buy a property you can easily afford that has improvement potential and that is in a stable area. If you don’t take this first step then all of the following tips will be useless to you.
2. Leverage The Equity Growth You Have
If you already own one or more properties then you can speed up your property growth by leveraging the equity you have in your properties. Saving deposits is a slow and tedious process. If you can tap into the wealth of your portfolio and use that to buy more property then you can grow your portfolio much quicker.
If you buy a property for $300,000 and assume it goes up in value to $400,000 then you effectively have $100,000 in equity in this property. You can only access this equity in 2 ways
1. You can sell your property and get the cash that is left over… In this case $100,000 (minus expenses)
2. You can borrow money against the equity (usually up to 80% of the value of the equity)…in this case $80,000
You can use your equity so that you don’t have to put any of your own cash into buying property. The deposit is paid for from the equity of your previous properties. The more properties you have the quicker your equity grows and the more properties you can buy.
Just be careful not to overextend yourself when it comes to your debt. Make sure that you can make the repayments of the equity loans. Using the following tip should help you do that.
3. Create A Positive Cash Flow
One of the main reasons people don’t buy more property is that they simply cannot afford to service the repayments on the property. That is they buy property that COSTS them money, thus they are limited in the amount of property they could afford.
If these investors could instead create a positive cash flow in each of their investments then each of their properties would PAY these investors to own them. Each month they would get a payment above all expenses that they could use to reinvest or spend to their hearts delight.
The simple fact is that if you purchase, and continue to purchase, positive cashflow property then you will be able to service your loans and you will be able to afford more property! This is because with every property you buy you are increasing your disposable income, by increasing your passive income. You aren’t decreasing your disposable income like you would be if you invested in negatively geared property.
THIS IS THE MOST IMPORTANT TIP IN THIS ENTIRE POST!!!
I cannot stress this enough, without cashflow you cannot afford to buy and own property. Increase your cashflow and you can grow your property portfolio.
This blog is jam packed with articles on investing in positive geared property. Visit the archives page to read through all our great articles.
4. Increase The Value Of Your Properties
Most people say that you should either invest for cash flow or for an increase in the value of your property (capital gains). I say why not do both?
You can increase both the rental income and the value of your properties by doing minor or major renovations. It is amazing the difference a coat of paint and some new carpet will do to the value of the property.
Don’t be scared to look for properties that need a little bit of TLC. These are generally the properties that are sold at a discounted rate. By increasing their value you are increasing your rental income (which can help you afford to service more properties) and it also helps you to increase your equity which you can use to buy more property.
Add value and you increase the speed at which you can buy properties. You can almost forget about saving for a deposit, because the increase in value will often be enough to provide a deposit in and of itself.
5. Have Ways Of Quickly Scanning The Market
If you want to be a multi-property investor then you need to have a way of quickly scanning the market for good deals. You need to have your pulse on the market, but more importantly you need a way of quickly and easily finding those diamonds in the rough that will make you a fortune.
Real Estate Investar is a great tool that helps you quickly scan properties on the market and find the properties that suit your investment criteria.
You can quickly and easily find positive geared properties, undervalued properties, properties that need renovations and even desperate buyers who may be willing to negotiate a good price or good terms.
The program carries with it a price tag, but the benefits far out weight the cost. Would you pay $1,000 to make $10,000? I certainly would. Would you pay $1,000 to save a loss of $10,000?
Spend 30 minutes of your time and view their free webinar. Once the webinar is finished you will get a FREE report of the Top 200 Yielding Suburbs in Australia.
If you decide against Real Estate Investar then you need to devise a process for fishing out the gems and ignoring the duds. Otherwise you will be spending hours searching through properties with no real results.
6. Keep An Eye On Your Portfolio
Your portfolio won’t simply take care of itself, especially in the early stages you need to keep an eye on your portfolio.
I have a daughter who is 18 months old. I have to keep my eye on her a lot. Otherwise she will cause a lot of damage to herself and the things around her. The same is often true for property portfolios in their early stages. You need to keep your eye on them and help them grow and improve. If you simply buy a property and expect it to take care of itself, then I doubt you will be able to buy more property in the future.
Keep accurate finances of the incomings and outgoings of your property. Keep your eye on the condition of your property and speak to real estate agents about things you could do to increase rental income or value. Choose your tenants wisely and make sure they are paying on time and taking care of your property. Pay just as close attention to your rental manager. If they are horrible then sack them and get a new manager.
7. Cut Your Losses When You Need To
If your dog died would you still continue to feed it? Then why keep a dead investment that is just costing you money?
There is a saying that says “When the horse is dead, dismount.”
It sounds like a stupid saying and it is. Who would remained mounted on a horse that was dead? But we do it all the time, we keep dead investments because we don’t want to admit we picked a dud or made a loss.
There is another saying that says “You don’t make money until you sell”. These people keep their properties when the value drops because they are afraid to lose money. They may keep the property for 10 years before it returns to the value they bought it for and they proclaim to the world that they “haven’t lost money”.
In my mind you are losing money when you keep a bad investment because you could be making more money (and gaining more experience) with a good investment. Financial people call this “opportunity loss”.
Do you hold onto investments because you are afraid to take a loss? Why not take that money and invest in a winner?
8. Mixture Of Positive Cash Flow And High Growth
If you have all high growth properties but no cash flow then you will soon find that you cannot afford to service your loans. But if you have all cash flow and no capital growth then you run the risk of having no equity to invest in new properties.
Your perfect combination of positive cash flow and high growth will depend on your risk profile and your time frame. If you want to retire in 5 years time then you might not want to risk negatively geared property, you may just want the cash flow to retire on.
However if you are young and want to grow your portfolio quickly and you love your job you may not be fussed about drawing an income from your property just yet. In this case you may want to purchase equal amounts of positive cash flow properties and high growth property. This way you can be neutral geared so that you aren’t out of pocket every money, but you are still achieving the equity growth you desire to speed up your portfolio.
I still believe it is possible to achieve BOTH positive cash flow AND capital growth. So I would always be looking for those properties first.
9. Don’t Cross Collateralise
Cross-collaterisation refers to having multiple properties securing one loan. If something bad happens then the bank may force you to sell multiple properties to service one loan.
Many lenders in Australia have an automatic cross-collaterilsation policy. This means that if you have 2 separate loans with them for two separate properties then they can still force your hand on the second property to service the loan of the first property.
I remember hearing of an investor recently who sold one of their investment properties to pay off their home loan. However, the banks forced them to pay off their other investment propertied first (that were mortgaged with the same lender as the property they sold.) The outcome was that this investor lost a lot of tax deductions and had huge cash flow issues and struggled to reinvest for years.
You can often avoid this by financing each property with a different lender. But it is best to speak to an accountant to discuss the finer points of avoiding cross-collateralisation.
10. Have An Investment Strategy
Not every property is a good investment, and not every property is a good investment for you. What may be a good investment for me might be a terrible investment for you.
Many people just go out and buy property without a second thought as to what their long term investment plan is. They just hope to make money.
This can work for one or two properties but if you want to buy more property than the average investor then you really need to have a strategy of how you are going to make money and what your end goal is.
If your end goal is $100,000 in passive income in 20 years then you are going to invest differently to someone who’s end goal is $1,000,000 in equity in 5 years.
Knowing your investment strategy allows you to create a list of what you want in a property. It then makes buying the right property much easier. You can narrow your market from every property, to just the properties that suit you and your strategy. You can then waste less time, make more money and grow your portfolio quicker.
I always like to under promise and over deliver. I promised you 10 tips but, for those of you who want a little more of the good stuff, I have gone ahead and created 3 bonus tips for you to sink your teeth into.
A. Focus Your Investments
This is an expansion of point #10 of having an investment plan. Find a way you want to make money from property and get really good at that one thing.
You may have a plan to buy run down properties and do them up to increase the equity and then rent them out. You can then increase the rental yield and hopefully produce a positive cash flow, and you have created equity you can borrow against to continue investing. Or you may plan to buy blocks on land and build on them.
Whatever your investment strategy, you will often make more money being focused and becoming very good at one thing than you will by trying to have all your fingers in different pies.
Find one investment strategy that suits you, then go out and study it. Read books about it, go to seminars and get your hands dirty by investing and testing out your strategy. Keep learning and getting better.
This may sound contradictory to the above point of focus, but if you will read on then you will find that it doesn’t contradict at all.
I stand firm on my previous statement that it is wise to focus on a specific strategy and learn to make it work for you. However, I also believe it can be extremely useful to outwork that strategy in diverse areas.
Be careful putting all your eggs in one suburb. By spreading your investments across a variety of areas you are increasing your chances of obtaining capital growth and rental growth each year. It is common for an area to go through a year where rents and house prices stay the same, however it is very rare to find that across a number of suburbs.
If one of your suburbs has a bad year then you can still achieve growth on your other properties. This is important because constant growth allows you to continue investing. If you have all your properties in one suburb and for 1-2 years prices drop or stay the same then for those 1-2 years you can’t access growth to invest in more property.
So be focused in your strategy, but have some diversity in the areas you invest in.
C. Get Educated
“The best return on investment you will ever get is when you invest in your education.”
The above quote is so true. The more you know about investing the less money you need to make a lot of money, the less you know the more money you need to make money. If you invest in your education then the amount of money you can make from your investments becomes almost unlimited.
If you don’t get educated then it will be a long and tiring road towards financial freedom. You will find that by the time you achieve financial freedom you are too old to enjoy it.
D. Interest Only Loans
I am not a financial planner so I cannot ‘advise’ you to use interest only loans, but I can state an obvious (and yet often overlooked) benefit for using interest only loans that may help some investors buy more property.
Interest only loans increase your cash flow by lowering your expenses. Increasing rent isn’t the only way to create a positive cash flow, you can lower expenses and achieve a positive cash flow.
Have a look at the savings you can achieve on a typical $300,000 loan. On a loan of $300,000 at 8% p.a. an interest only loan will cost you around $461/week in interest, and a principle and interest loan (over 25 years) will cost you approximately $534/week. That is a saving of $73/week or $3,796/year.
If you earn $45,000 per year you just freed up about 10% of your after tax income. This $3,796 could be used to service another loan or to save for another deposit. It could also mean the difference between positive cash flow and negative cash flow.
Always speak to a qualified accountant or financial advisor about interest only loans, but at least consider them as a way to lower you expenses. Over time as rents increase you could move from interest only to principle and interest and allow your tenants to completely pay off your loan for you without ever having to put $1 into the loan yourself.
You CAN buy more than one or two properties! You just need to be smart about it, invest wisely and be persistent. Imagine the financial freedom 10-20 properties all paying rent could provide you with. This is completely achievable if you put these tips into action!
Courtesy of onproperty.com.au