The next part of our approach to property investment that I have discussed in recent posts is to repeat the process every few years or as frequently as you are comfortable with so you can safely and slowly accumulate a portfolio of properties in different locations and at different times in the property cycle.
As the rental returns increase on your first property, and the equity grows such that you feel you can afford to own another, then you buy another. There is no right rate at which to do this, apart from understanding that you don’t want to stretch yourself too thin, but the longer you own each property, the better.
By spreading them out over time you are likely to buy at different times in the property cycle, rather than running the risk of buying multiple properties at the peak of the market. By doing this, you no longer need to worry about trying to time the market.
I think that people get concerned about the total debt they have, but the way to look at an investment property is by how much it is going to cost you every year to own it.
If it costs you $150 a week to own your current $400,000 investment property, you may decide to wait until that falls to $50 a week, as your rental income rises before you buy the next one. When you buy the next one, you are spending $200 a week on your two investment properties. A few years later, as rents increase on your first two properties you can now buy a third and it may still only cost you $200 per week.
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As an example, it may take you ten years to eventually have $1.5M in property with $1.2M in investment loans. If they increase in value by, on average, just 3% a year, that is $45,000 every year that you are growing your wealth, which compounds, tax-free, until you sell them. It is only costing you $10,400 per year (and falling, as rents rise) to own them.
|Case Study: quick look at investment numbers|
|Interest rate||6.00% pa|
|Rates (will vary between councils)||$1,200 pa|
|Property manager (@10% of rent)||$2,137 pa|
|Total expenses||$4,437 pa or $85.33 pw|
|Total weekly cost||$714|
|Average weekly rent||$411|
A quick check on the numbers will show $714 per week in mortgage and expenses and an income of $411 per week. This leaves a shortfall of $303 per week. But the story doesn’t end here. By using a combination of the depreciation on the property AND your finance expenses against your income, you can get a combined tax reduction in the order of up to approximately $10,000 each year. This reduces your weekly commitment (covering your new investment property) to just $110 per week.
You can even claim your tax refund in advance from each pay cycle to help with cash flow. Search the ATO website for PAYG withholding variation application for more details.
It is now even more important to review your home and investment loans regularly to make sure you have the cheapest possible structure. Run your investment portfolio like a business-keep your costs down and income up. In terms of structuring your loans, the idea is to prioritise your home loan over the investment property loans as your investment loans are tax deductible. You do this by having a principle and interest loan on your home, and an interest only loan on your investment properties. Once your home loan is fully paid off, you can start paying off the investment loans, which is really another way of saving money because you will get it back when you sell them (and pay less interest in the meantime).
To summarise, while no form of investing is guaranteed, my personal view is that gradually building a portfolio of low-cost new homes in new land developments within major capital cities is a safe and simple property investment path.