If you read last months column on how it can cost as little as $50 per week to own one investment property (after the rental income and tax benefits), you may well be asking yourself how to take it to the next level and build a portfolio of investment properties
Building equity is the key to success
Essentially, equity is the difference between the value of a property and the loan amount secured by it. You will usually need a deposit of at least 10 per cent of the property value to qualify for your first property (plus any additional costs such as stamp duty if applicable). However, to buy another property you generally need to increase this equity to about 20 – 30 per cent. This way, 10 per cent remains as security for the current property, and the other 10 – 20 per cent can be used as a deposit or equity towards your next purchase.
Of course, in order to qualify for and afford the loan and any future interest rate increases, you will need the appropriate income and cash flow to meet the lender’s criteria; but this should always form part of your strategy so that you won’t be forced to sell prematurely or over expose yourself to debt.
A good way to build equity is to pay down the loan, but the most effective way is to do your research and source property that ticks all the boxes for high capital growth. For more on this subject, see our previous article on the six steps to successful property investment part two (Research – the smart way to high returns).
The sooner you increase your equity, the sooner you can buy another property and start receiving capital growth on two properties instead of one. If you have done your research and selected your properties well, you should have accumulated enough equity for a third property almost twice as quickly as for the second. From then on, the principle is simply replicating the same process but generally with a little more equity required for each step.
Next month we examine the issue of how much property you need to comfortably retire. A subject I’m sure that is close to many of our hearts!
Richard Sheppard is the Managing Director of inSynergy Property and Finance Solutions. inSynergy provides professional property investment advice, property market research, specialised mortgage broking services and is an accredited investment property buyers’ agent. Visit www.insynergy.net.au or phone 1300 308 808.