Purchasing multiple investment properties with minimal risk in a relatively short space of time is possible with the help of an experienced advisor.
It may sound like a pipe dream for some – buying 10 investment properties in 10 years, but with the right advice and financial strategy it’s highly possible to achieve this outcome both safely and effectively.
So, what sort of position do you need to be in to embark on this journey?
If you’re single, on an income of at least $100,000 increasing to $200,000 by year 10, with no short-term liabilities, paying around $600 a week rent, or if you’re a couple with a combined income of $150,000 increasing to $250,000 by year 10 paying around $800 a week rent, then all you need to get started is a deposit of around $60,000. Better still, if you have a qualifying guarantor or spare equity in an existing property, you can start investing with no savings. Regardless of your financial status, seeking robust advice and taking out income protection is highly recommended to manage risk.
Deposit in hand, all you then need is about 6 per cent capital growth on a $500,000 new or near-new investment property that rents for around $500 per week in a well-selected location. Most new $500,000 investment properties in the right markets – for someone on an income of $100,000 or more (factoring in today’s interest rates of 3%) – should make you $50-$80 per week after tax and depreciation benefits. To further reduce risks, you could take out a three-year fixed rate loan at 2.4% (on all or part of this loan depending on strategy) and save around $200 per week to build up a cash reserve as a buffer.
Use your equity
After securing your first purchase, the key is to learn how to use your equity to buy additional property and understand how to manage risk. Once you buy the first property for about $500,000, paying interest only on the loan, and the property grows at 6 per cent per annum for two years, you gain another 12 per cent in equity and have $20,800 in your savings account from your $200 per week savings.
If you then use that 12 per cent equity as the 10 per cent deposit and costs for your next property, with the extra 2 per cent as a buffer or cash reserve, you could invest in your second $500,000 property. That would give you two properties, which are growing in value. So, factoring in a conservative 6 per cent growth for each property, by about the fourth year you would have enough equity for the third property.
Once you have three or more properties, with 6 per cent growth, your equity grows more quickly, which means you can then buy about one property each year with a bigger deposit and buffer each time. Two properties could be purchased in the 10th year, bringing you to a total of 10 properties.
By this time, the portfolio of 10 properties (assuming a 6 per cent growth rate) is worth a total of $6.5 million, with the loan total at $5.2 million. But if you kept saving the $200 a week, you would have savings of $104,000, plus the investment buffer of extra loan funds borrowed of $100,000.
Of course, this scenario over-simplifies the strategy of buying multiple properties and taking on a lot of debt quickly. While we have ensured the model and strategy incorporates some of the key safety strategies of using income protection, fixed-rate loans and building up a buffer of savings and extra borrowings, there are many other variables involved that can significantly affect the outcome, so you should only ever embark on this journey on the back of professional advice from a highly qualified and experienced property investment advisor.