So you’ve bought your first property and are now looking to start a portfolio. The majority of property investors in Australia own just one or two investment properties, but the key to building a portfolio is having a solid strategy in place. In this article, we discuss some of the basic steps you should take when starting to build your property portfolio.
Plan for the long term
Building a successful property portfolio requires commitment over the long term. Every situation is different, but generally the longer you keep a property, the more likely you will be able to ride out market lows and maintain overall profitability. A long term strategy will help to ensure that your acquisitions and sales are in line with your goals no matter what is happening in the market.
Speak with a professional
The first step you should take, before applying for any loans or visiting open houses, is to speak with an industry professional. A Track Financial investment loan specialist can help you to work out exactly how much you can borrow, and more importantly, how much you can afford to repay without impacting your current quality of life. They will also be able to share general market information and trends to help you start your property research, as well as connect you to other property professionals.
Make sure you understand LVR
Loan to value ratio is a figure used by lenders to determine the maximum borrowing limit based on security value. Generally, Australian lenders will provide up to 80% funding of the security value for residential properties over 50sqm. For example, they will provide up to $800k against a property valued at $1M (higher loan amounts are possible but are subject to expensive Lenders’ Mortgage Insurance).
Once you have more than one property, you are able to cross-collateralise, ie. use the equity in your first property to fund the purchase of your second, and so on. For example, if your first property is valued at $1M and your second property purchase price is $600k, you may be able to borrow a total of $1,280,000 secured against both the properties (80% of the total security value).
Define your strategy
There are two main strategies to profit from property investment: rental yield or capital growth. Ideally, your investment strategy will deliver both, but this is not always possible. Deciding which strategy you will focus on will help you to make structured buying decisions and build a more successful portfolio.
Aim for positive cash flow
Unless you are on a very high income, you may need to aim for positive cash flow, which means that the rental income covers the cost of the property. In addition to mortgage repayments, you’ll need to budget for expenses such as rates, water, taxes, repairs, management fees, insurance and periods in which there are no tenants. Evidence of positive cash flow will make it much easier to have future loan increases or portfolio changes approved.
Negative gearing is another investment strategy used by high income individuals to increase their total taxable income. Negatively geared properties have higher expenses than income, and the losses are offset against your salary thereby reducing the total amount of tax payable. If don’t correctly, you may even achieve a negatively geared property with positive cash flow!
Whether you are interested in dipping your toe into the property investment market or have been at it for years, Track Financial can help you to find the best lending solution for your portfolio. Contact us today for a portfolio review or to find out more about how we can help you build wealth through property.