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 most people – buying 10 investment properties in 10 years.
But such a scenario is actually very possible, and safe, for many investors if they carefully control their finances and get sound advice from an experienced investment property specialist.
Who can do it? The dream is achievable for someone in a similar position to this – a single person on an income of at least $75,000 to start, then $200,000 by year 10, with no liabilities who is paying $400 a week rent, or a couple with a combined income of $100,000 to start, then $240,000 by year 10 paying $700 a week rent. All they need to start is a 10% deposit of $50,000, or $15,000 if they qualify for the first-home owner benefits.
Better still, if you have a qualifying guarantor or spare equity in an existing property, you can start with no savings. Regardless of your financial status, however, seeking robust advice and taking out income protection is highly recommended to manage risk.
Deposit in hand, all you then need is about 6% capital growth and a $500,000 new, or near new, investment property that rents for close to $500 per week in a well-selected location. Most new $500,000 investment properties – for someone on an income of $80,000 or more, and factoring in today’s interest rates of 5% – should cost less than $20 per week after tax and depreciation benefits. To further reduce risks, you could take out a five-year fixed rate loan at 4.99% and save around $200 per week to build up a cash reserve as a buffer.
Use your equity
The key to securing your first purchase is to learn how to use your equity to buy additional property and understand how to manage risk. It is not overly difficult and can be learned in about a day at a respected property investment workshop type course.
Once you buy the first property for about $500,000, paying interest only on the loan, and the property grows at 6% per annum for two years, you gain another 12% in equity and have $20,000 in your savings account from your $200 per week savings
If you then use that extra 12% equity as the 10% deposit and costs for the next property, with the extra 2% as an extra 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 6% 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% 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 the 6% 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 compounded savings of $175,000, plus the investment buffer of extra loan funds borrowed of $100,000.
Of course, this short column over-simplifies the strategy of buying a lot of property 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 take such action on the back of professional advice from a highly qualified advisor.
This article was first written by Richard Sheppard for the October issue of Peninsula Living Magazine.