If you own a home and you are thinking about building a property portfolio, it may not be as difficult as you may think. The equity in your home may be enough to invest in a second property. The equity is the difference between the value of your property today, versus your remaining mortgage balance – so if the value of your home has increased since you bought it, and you have paid off a portion of your mortgage, you have built up equity that you can leverage to buy your second property.
If you do not own property yet, you may need to secure a loan. Make a list all of your assets, income and expenses to understand how much cash you have available to invest. As long as you have stable employment and a good employment track record, you should be able to get a loan.
Whichever route you decide to take, you will need to be aware of all potential costs associated with the purchase – stamp duties, legal fees, building inspection costs and bank and mortgage fees. Work out your ongoing expenses such as utilities and council rates, repairs and maintenance, rental agency fees, and property insurance.
If you need to, you can consider getting a friend or family member to guarantee a percentage of the loan – these days some banks will allow a percentage guarantee – for example, if you need assets to cover 20% of the value of the property, and you only have coverage for say 10%, you could get a guarantor to cover the remaining 10%.
Another possibility is to approach the owner of a property in which you have an interest, and see whether he or she would be prepared to allow you to pay off the purchase price. If you are interested in doing this, get professional advice in structuring the sale and contract.
Finally, you could consider partnering with someone who has the money, in an agreement where you do the work, your partner supplies the finance, and you share the ownership.
Once you have worked out your funding strategy, you need to think through your investment strategy. Are you looking for rental yield or capital growth? Ideally your strategy will deliver both –but this is not always possible. If income is a constraint or your job is not so secure, you will want to prioritise rental yield – so you will be looking for a positively geared property which means that the gross rental income is greater than the costs of owning the property.
If you are on a higher income, you may decide to prioritise capital growth as you are confident that you can cover the mortgage costs. Some investors choose to negatively gear their properties (rental income is less than the costs of owning the property) in order to reduce their tax payment at the end of the financial year. If you rent out the investment property, you can cover your costs through a combination of the rental income and the tax incentives that favour investment. Expenses such as repairs and depreciation can be tax deductions, thus closing the gap between your costs and your rental income.
If your potential rental income will be less than the costs associated with the property, remember that you can offset this loss against your income such as salary and wages, business or investment income. Also consider that a new or near-new building is depreciable over 40 years at a rate of 2.5% per annum. Fittings and fixtures can be depreciated over 5 years. You will need to get professional advice in order to maximise your tax advantages and also provide guidance on aspects such as depreciation.
Building a property portfolio is a long term endeavour. Every situation is different, but the longer you hold onto your property or properties, the more likely you’ll be able to ride out any downturns in the market cycle.