What you must know to get started and build a successful property portfolio

Residential Property investment is one of the safest and proven wealth creation vehicles in Australia and has created many millionaire success stories from average income families.

It’s like anything though, if you don’t understand it or take the time to get educated, you are never going to know what you can really achieve in the one opportunity you have at life.

This is why I have decided to put together this Blog to share what I have personally learnt building my own property portfolio and how you can use the formulas and strategies to fast track your own success.

Why Property

To build any real wealth it constitutes maximising four main components, often called the “Four Pillars Of Wealth.”

Having an understanding on each of the four pillars will allow you to determine how property investment fits in to be a very powerful wealth building vehicle.

1. Leverage
2. Capital Growth
3. Income
4. Tax

Leverage –  Leverage is using other peoples money ( Financial Institution) that allows you to hold a larger valued asset base resulting in higher capital growth and cash flow. Leverage is best described as how much the bank will lend you against that asset, with property you can borrow up to 90% of its value. If you compare this to borrowing for shares it would be 40-50% of its value and only on certain shares.  For example if you wanted to purchase an investment property for $450,000, you would need a deposit of $45,000 using a 10% deposit and the bank would lend you the other $400,000. This means you can borrow from the bank 10x the amount of your deposit for property. If that property went up in value from $450,000 to $500,000, you can leverage against it for another deposit for your next property and repeat the process.

Capital Growth – Capital growth is where the property increases in value, for example if you purchased it for $450,000 and it went up to $500,000 you would have made a $50,000 capital gain. Residential property in Australian capital cities, not regional markets, has doubled in value every 7-10 years for the past 50 – 60 years. It has a proven track record and why it has the famous saying “Its Safe As Houses.”

Income –  Property Investments produce income from the tenant paying you rent, if you buy the right properties the rent can cover the mortgage repayments leaving you with very little out of pocket costs.  Rental yields always increase over time where the property can then start producing a passive income that you can either reinvest, reduce debt or just live a better life style.

Tax –  Property investments have ATO approved legislation where you can offset a properties running costs against your taxable income allowing you to pay less Tax. Costs like the interest on your loan, Property Management fees, rates, insurances, and maintenance just to name a few. Brand new properties have significantly higher tax deductions through the way of depreciation on the building and fixtures and fittings, this is what is called a non cash deduction, meaning it costs you nothing to claim apart from buying the property. It’s namely the best tax deduction you can get in property investment. This essentially means that it is increasing your cash flow on a weekly basis, allowing you to build a profitable property portfolio without altering your lifestyle.

It’s important that you have a property focused Tax Accountant on your team so you can ensure you are maximising all your tax entitlements legally.

How you can claim your Tax back for your property in your pay packet 

The great thing about property investment is you don’t have to wait until the end of financial year to get back your big tax refund. This can be claimed back on a weekly or fortnightly basis in your pay packet. It’s done through a PAYG Withholding Tax Variation, which is usually prepared via your Accountant and lodged with the ATO.  The ATO will then approve it and send a letter to your employer asking them to pay less tax for you, putting more money into your pay packet each week. This allows you to increase your cash flow throughout the year rather than waiting until end of the Financial year to lodge you tax return and receive your Tax refund.

To get more information on the “Four Pillars Of Wealth” watch this video:

Finance Structuring To Mitigate Risk And Build Your Portfolio Faster

Using a professional and experienced Finance Broker that specialises in property investment loans is a MUST if you are going to build a successful property portfolio.

Biggest Mistake Most Property Investors Make is Cross Collateralisation of their loans 

If you are buying an investment property, most people would just go back to the bank that has the mortgage over their own home, lets say it’s ANZ for this example, and you say “I want to buy this investment property worth $450,000”. ANZ would say “Great, you have sufficient equity in your property ( Value – Debt is your equity) and your serviceability is good, we can lend you the full amount being the $450,000 for the new purchase, plus costs being stamp duty, Solicitor, etc”. Then ANZ want as much security as they can get over you so they cross secure the full investment property against your own home, putting it at risk. On top of this, you don’t want to give one bank all your business as they will then have full control of you and it will impact your ability to grow your property portfolio. It is always best to spread your exposure across multiple banks.

How We Structure Your Loans To Mitigate Risk Against Your Own Home

Our Investment Finance Brokers would go to ANZ who have the mortgage over your own home and ask to refinance some of your equity into to an investment equity loan, enough to cover a 10%  deposit plus the associated costs like stamp duty, Solicitor costs and enough for a safety buffer for piece of mind, say it was for $80,000 to keep it simple and call this Loan A.

The next step would be to get the other 90%, we call this Loan B from another bank say Westpac for example, so we would be borrowing $405,000 which is 90% of the properties value from Westpac. This means that the investment property is not cross collateralised with your own home mitigating any risk. You are still borrowing the same amount of money if you did it as one loan, but by splitting the loans it is keeping you with far less exposure on your own home.

If you need to get more information on Cross Collateralisation you can watch my video below:

Why You Need A Finance Broker That Knows How To Maximise Bank Valuations

When you are building a property portfolio your equity is your ability to buy further properties. There are three ways to increase your equity in your property, you can pay down the debt, the property increases in capital growth with the market, or you can add value to the property through renovation/ home improvements or subdivision. When you are leveraging the equity out of the property, the bank needs to value it to determine your equity position.

The fact is that if you get three different bank valuers from three different banks to value your property, you will likely get three different results. One of our QLD clients principle place of residence was valued about 6 months ago, using fair market comparable sales, we estimated it’s worth at $720,000 – $730,000 yet the bank valuation came in $100,000 below at $630,000. Just three months later we had it revalued by the same bank but a different valuer at $725,000. This is where you need an investment Finance Broker on your team to run two or three bank valuations so you can select which is the most favorable, fair market valuation to allow you to access enough equity for your next property purchase.

Watch this video to get more information on Bank valuations:

Why We Buy New Property For A Buy & Hold Strategy

We have different levels of investment depending on where you are at in your investment journey. If you are just starting out, we will be looking to build a solid foundation to your property portfolio as these will be the properties that will do the heavy lifting and allow you to advance your portfolio to the next level.

Why we focus on buying houses rather than units and apartments

If I drill down into what component of a property that actually grows in value, it’s the land that appreciates in value and building that depreciates in value. If we then look at what type of property that actually holds the most land content, it is standard detached houses. If you then look at the demographic that mostly live in houses, it is families. Not many families live in apartments and why there is always stronger demand and higher capital growth for houses in capital cities.  Buying houses in major capital cities with good infrastructure will be the best growth asset that allows you to balance capital growth and cash flow. That was pretty simple wasn’t it, but it strategically makes sense.

Read Full Blog On Capital Growth Vs Cash Flow Here >>

“The Intrinsic value is in the land”

• House – 40-50% land content
• Townhouse – 20 -30% land content
• Apartment – 10% Land content

“Investing in houses allows you to be a growth focused investor whilst still being able to manage and balance your cash flow”

Many investors get caught up in buying flashy off the plan inner city apartments because they buy emotionally and not strategically. If you look at the major capital cities, they are over supplied with apartment stock levels either on the market or due to hit the market in the next 12-24 months. Some of the banks have blacklisted specific postcodes meaning they will not lend money in those areas due to high risk of prices declining due to the huge oversupply.

Advantages of building a new property 

If you are building a property portfolio through a buy and hold strategy and or small development projects, e.g duplex or triplex projects, you would generally have an older home on the front and subdividing the block and putting one or two new townhouses on the back.  Some benefits of a new build are:

1. Better Tax deductions through depreciation on the building and fixtures and fittings
2. Tenants are always prepared to pay more rent for a new property
3. You only pay stamp duty on the land and not full purchase price
4. Builders structural guarantee and warranties
5. Less maintenance costs on a new property
6. Targeted growth corridors in major capital cities with hundreds of millions of dollars of new infrastructure
7. High quality fixtures and fittings
8. Better structure to duplicate
9. Better resale value

Finding The Right Investment Property In The Right Locations That Are Primed For Growth

We have an extremely strict buying criteria when it comes to property selection across the Australian property market. This is where a lot of investors get it horribly wrong, they only think about buying a particular property and not focusing on how that property will allow them to buy your next property the fastest achieving the power of Compounding Growth.  

Most people looking to invest just get on realestate.com to conduct their research which is merely scratching the surface.

Getting professional help and using the right team allows you to fastrack your investment results without making timely and costly mistakes.

MACROS In Property Investment 

1. Economic Drivers
2. Cycles
3. Markets
4. Job Growth
5. Population Growth

MICROS In Property Investment 

1. Schools
2. Shops
3. Transport
4. Infrastructure
5. Location

I won’t go right into all the metrics now as I have already overloaded you with a lot of information to absorb, but we go through this as part of our educational process for our clients.

Our Advanced Duplex and Dual Key Occupancy Investment system

Dual Key Occupancy Property – These properties are custom designed for our clients that allows them to achieve a positive cash flow, without having the risk of investing in regional markets like mining towns.  A dual key occupancy property is for example, a 5 bedroom, 3 bathroom home constructed on one title.  This property can be divided by a common wall to create two living areas that can be rented out to separate tenancies.  This allows our investors to supercharge rental returns and become cash flow positive from day one, meaning the property generates you an income.

Watch this video to get more information:

Our Duplex Development System That Manufactures Instant Equity And Cash Flow

Duplex Development System – This is an advanced investment system where you you can create instant equity and a positive cash flow. We find a block of land that you can build two dwellings on and after the construction has been completed you can split the one title into two, so they could effectively be sold as separate dwellings. This allows you to create instant equity and a positive cash flow so you are able roll the available equity out and repeat the process. This complete process is project managed for our clients.

Watch the Video For more Information on the Duplex Development System:

What Is The Next Step

Well…. you have already started if you have got this far, you have started educating yourself which is a huge step in itself.

Borrowing Capacity 

No matter if you are a first time investor or an advanced investor with 10+properties, having your borrowing capacity calculated is the first step. This allows you to see how much you can borrow from the bank for your first or next property. As an property investor this should be conducted every six months so you can see how you are tracking and if you can move onto your next property purchase.

This is NOT a loan application but a simple process where we assess if you have the available resources to get started at this point in time. Things like available equity in a property, or cash savings and what level of disposable income, along with any other financial commitments are all taken in to account to determine if you have a borrowing capacity to get started now or in the next 6-12 months.

Strategy 

The outcome of your borrowing capacity will allow our team to determine the best suited strategy and property for your current financial position to start or continue your journey to replacing your income through property.

I know I have given you a massive amount of information here and I am sure you will get some great value from it. Should you have any questions or would like to discuss anything further, we are able to help you get started in 2019, book a quick introduction call below.

Book Your Call Here >>

To Your Success

Wade Curtis

CEO