How do you grow your property portfolio by using the equity in your existing home or investment properties to fund future investment property purchases, financial security, retirement or lifestyle?
If you can obtain 100 per cent finance when purchasing an investment property it will most likely be at a high interest rate and attract a high mortgage insurance premium. This may still be an attractive way to go, as you won’t have to come up with a deposit which would normally be between 10 per cent and 20 per cent of the purchase price. But if you have to find a deposit amount for your purchase, then using the equity from your home or other investment properties is a good option.
The way we do it is to refinance our home or existing investment properties every 12 months and then keep the equity in a loan offset account or as a line of credit (LOC) against the property. This money is then available to fund deposits for future property purchases. When we need the money for a deposit on a new investment property, we withdraw it from the offset account or LOC and use it as the deposit on the new investment property. We then seek the remaining amount from another bank. By doing it this way we’re not financially linking the two properties, as opposed to cross collateralising them had we obtained the finance from the same bank. To achieve this, we’re physically taking the money out of one property and using it to purchase another. Remember from the previous step on obtaining finance, we prefer not to cross collateralise one property against another. This is a vital point to understand.
Remember, always buy with the intention of gaining maximum leverage from the funds that you have available to you. In this way you will stretch your investments further and get more “bang for your buck”. The way to do this is to use as little of your own money as you possibly can, at least in the first instance. Over time you should allow some level of equity to stay in the property as insurance for a “rainy day”.
Another way to gain maximum leverage from your available equity is to buy property at a discount. We always try to get at least a 10 per cent discount on the purchase price. By buying at a discount you’re effectively freeing up more of your own funds to buy more property. This is how we built up our portfolio.
Value adding allows you to also gain maximum leverage by buying a property on a large block of land that can be subdivided. A client of ours recently did this. She purchased a fully renovated house on a large block of land that could be subdivided. She negotiated a discount and the rent she’ll receive from the existing house will make the deal almost neutrally geared. This will allow her the time to subdivide the block or to build another three units on the block, which will also provide her with significant cash flow and capital growth.
In the game of property investing, it’s important you consider all your options when it comes to maximising your investment. Buying at discount, adding value and financing your deals effectively can allow you to grow your portfolio quickly. This is how I and Helen did it.
