The Holy Grail in property investing is to build a portfolio without running out of buying power. That is why the 40% LVRs make things difficult; all of a sudden, your buying power takes a massive hit.
New builds are great investments, but looking to new builds solely because of the 20% deposit does not help as much as it seems; the second you go back to the bank to refinance the deal (or deals) and invest again, you first need to top up to 40% equity on the existing purchase and then come up with the deposit for your next one.
Before I go any further, if your goal from property investment is to own one or two properties and use them to fund your eventual retirement, while you enjoy a stress-free life in the meantime, this advice solves an issue you don’t face. I would get/build/finagle a one or two-dwelling property in the market of your choice, set the loans to P&I, bank feeds to Xero, keys to a property manager, and go fishing. Try to get your income from the deal as high as you can because it will never be as easy as during the planning stage, the cost of doing stuff is only getting higher, banks like it when you earn more and decent cashflow is widely viewed as a good thing.
If you want to use the capital or equity that you have to create a larger portfolio faster than natural capital growth or your savings rate will take you, then here is a simple rule to keep you trucking along.
Have, or create, the capacity to do another deal after your next purchase. A buy and hold deal will need to create enough equity for you to then invest again once you have it settled, renovated, built, subdivided, painted, remodelled or whatever your plan is. This might be a decent length of time so add your savings to the mix if you like.
If you are staring down the barrel of “one and done”, then instead you take on a project that you can turn around and sell at a profit, pay your tax, and with that extra capital relook at the rule mentioned above. This might be a joint venture with someone you know, or a project you do yourself.
Many, many investors have followed this system to both build a portfolio and enjoy a good income. The projects to on-sell could be a build, subdivision, development, trade, add a dwelling, relocatable ... anything really. I have made money by buying a property at mortgagee and then reselling as a normal listing (I took on the risk of mortgagee and sold without that risk).
This approach worked for me. I have built up a reasonable portfolio in only a few years by improving properties that I bought and making sure I was building capital to buy the next. The key is to be able to buy and keep going. In this article I am limiting the “do stuff to make money” options to property deals, where any business would work. If you were successful enough buying and selling widgets, then you wouldn’t need to flip houses or do a spec build to raise the deposits for your buy and hold portfolio, although every bit of extra capital helps.
You will need tax and structuring advice before you start because both types of deal are taxed differently and usually require two entities. A property accountant will help you.
You will also want to build a relationship with a mortgage broker and a good insurance broker. Also, someone who has done this before and can help you find deals – iFindProperty is a buyer’s agency and can do this for you.
Lastly don’t try to make millions while paying pennies. Your team will help you succeed – if you value their input, don’t haggle, and pay them on time. This is a relationships’ business and at a time when tradies are as scarce as hens’ teeth my builder picks up the phone on the second ring.
This article was published in the August 2021 issue of the New Zealand Property Investor Magazine and is shared here with permission from the magazine.
The magazine is an excellent resource with digital and print options. We highly recommend it.
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