Property investors often aspire to build a multi property portfolio. They start out with all the good intentions, then something pops up and knocks them of track. This slows their momentum or worse derails their plans and they don’t pursue more properties.
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Some of the biggest road blocks we find that stop investors from growing their portfolios can be traced back to the start. Even before they purchase their first investment property.
Here are a few things that upset the wonderful intentions of building a multiple investment property portfolio:
- Not having a clear goal of WHY you want to do it
- Not working within your current financial position
- No planning or strategy for future purchases
- No professional or experienced advice explored or acted on
- Not understanding the cash flow of different types of properties and the impact on your tax.
- Decisions based on fear
Having strong goals will keep you motivated and pull you along when you stretch outside of your comfort zone. Knowing your purpose for WHY you want to build a multiple property portfolio will also keep you on track, helping to prevent you getting distracted by the next shiny object that catches your eye. Be clear on what you want to achieve. This goes beyond wanting to own property: it could be to have an income in retirement above the pension, to be able to freehold your home early, to have more money to travel, to provide your family with financial security, to help the kids out with their first home. Now you can look for the right properties that give you the best chance of achieving this and not rely on hope or to be sold on someone else’s dream.
Start from where you are
Work within your current financial position. This includes the following:
- Knowing your personal income and expenses, it’s that horrible word “budget”. This can be a simple budget that covers your known expenses, so you are aware of how much spare income you have available in supporting your investments.
- How much available equity or savings do you have? Knowing your equity position and how much you can access will determine your purchase price and how many or how fast you can build your portfolio.
- What will the banks lend you? Seek an indication of your borrowing power from a mortgage broker who can compare the many different lenders. You may be surprised in the loan amount differences between lenders.
- Understand your risk level and don’t take on more than necessary. If it’s your first investment property, start with one, gain the practical experience of running an investment property and once you’re more confident, then move on to your next purchase.
What’s your strategy?
Plan how you are going to purchase multiple investment properties before you start. Once you know your current position, you now know what you have to work with.
Here are a few items to consider when developing your strategy;
- How are you going to set up your loans?
- Are you going to use different lenders?
- Which lenders do you use first?
- Do you cross collateralise your mortgages against your home or existing investment properties.
- Do you pay the lender’s mortgage insurance and preserve your capital to fund more properties?
- Which mortgage insurers do you use first?
- What name/s will the properties be bought in?
- How do I manage land tax?
- Is my after tax cash flow important, if so how do I get the biggest refund?
- Do I purchase new or old, or a combination of both?
- How much time do I have available or willing to put in?
- Do you use professional property manager, if so who?
- What areas will give you the best growth and rental returns?
- Do you buy in the same area or different areas and or states
Having a support team pays
Purchasing a property as a home owner or as an investor requires the services of a team of professionals. As an investor wishing to grow a property portfolio, you will need a few extra professionals on your team. Selecting a good reliable team that gets the job done and protects your back will pay big dividends and help you sleep at night.
Some team players you will need:
- An experienced consultant with Investment Properties – like Properties 4U
- A specialist mortgage broker
- A qualified risk advisor
- A proactive property manager
- A competent solicitor or conveyancer
- A positive accountant
- A detailed quantity surveyor for depreciation reports
- A skilled insurance broker
- A handy maintenance person
Lean on and learn from your team’s expertise and their experience. Sometimes it may cost a little more upfront to use good people, however think of it as insurance, if something goes astray, you will be glad you had them on your team. If you make a mistake with property investing, it can be a very costly exercise and take a long time to recover. Don’t let ego get in your way or the opinions of “others” who may have well intentions and no experience influence you on how to build your dream.
Cash flow is king for multiple property owners
Managing your cash flow is very important when building an investment portfolio. You want to take advantage of all the resources available to help you grow your properties. A major resource that is neglected by many investors is the use of depreciation to gain a bigger tax refund. The bigger the tax refund, the less of your own money has to be used and you can turn a negative cash flow into a positive income after tax. The best way to maximise your after tax cash flow is by purchasing new properties. New properties will give you the high depreciation on the fixtures and fittings, plus depreciation on the cost of construction for 40 years. New homes have low maintenance and come with builder and appliance warranties. Tenants if offered a choice over a new or old property will more likely choose the new home and pay more for the privilege.
The difference in choosing the wrong property can cost hundreds of dollars per month out of pocket, before and after tax. Before you purchase an investment property check out the cash flow and purchase with knowledge, keeping within your strategy.
Starting out on the journey to build your wealth with a portfolio of properties can be over whelming at the beginning. Committing to your first home loan can be scary with the monthly repayments and the large mortgage debt. Then to think about taking on more debt and repayments, relying on tenants to pay their rent, maintenance raises doubt and oh no I’ve still got my home loan as well.
With fear we lose sight of our purpose, neglect to seek professional advice, forget about a strategy, do very little research, listen to the opinion of others and then either jump in with any property out of frustration or buy something because it’s cheap, with a small mortgage.
A couple of years down the track and now the property is costing you money out of your pocket and hasn’t moved up in value enough for you to keep growing. By year three most investor have sold their property and don’t buy anymore as it didn’t work.
Preparing and seeking the correct advice before purchasing a property will give you confidence and understanding so you can make better decisions. Better decisions will lead to belief in you CAN do it, an enjoyable experience and excitement in your future.
When fear (False Evidence Appearing Real) is replaced with knowledge, you can focus on the best outcome based on correct information and the size of the mortgage is no longer the deciding factor, it is your cash flow, future returns and achieving your financial dreams.
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