Multiple Investment Properties
It seems as if everyday there is another story about an investor who managed to purchase multiple investment properties. These stories may have you questioning how you can do the same yourself. We’ve taken the mystery and come up with a list of ways you can buy multiple investment properties.
Build your equity
As you pay off your current mortgage you will build equity in the property. You can then use this equity to purchase additional properties provided you can access it. As you make mortgage repayments you build up the share of the home that you own. You can then use this to access equity from your home. A home equity loan allows you to purchase an investment property. When you own an investment property it is important that you have a secure income. You can secure your income by having stable, long term tenants that are happy in your home. They will be happy and likely to remain in the property longer if you maintain the property well. To ensure that you know your current rate of equity it is also important to get regular property valuations done. Ideally you should have your property valued at least once every 12 months.
Key Points on Building Equity from 1st Property
- Don’t over spend on first owner occupier property. Have your home loan as small as possible.
- Make use of government schemes like first home guarantee, regional home guarantee, etc
- You can build quick equity buy buying a renovator with decent land size.
- You need a good mortgage broker to understand your goal and work with you.
- For investment, you need to look for positive cash flow properties.
- Its better to purchase brand new or near new properties so that you can benefit with larger depreciation & tax refund.
Increase your borrowing capacity
Lenders offer home loan equity loans but in order to qualify for these loans you need to ensure that you have adequate borrowing capacity. Although you can increase your borrowing capacity by increasing your income, there are other things that affect your borrowing power as well.
The more debt you have, the lower your borrowing power so try to avoid taking out loans you don’t need. If you have existing loans then work on paying them down as fast as you can. This will build the trust with your lender and allow for higher borrowing capacity.
Your borrowing capacity is affected by your credit rating. Every time you apply for credit your score goes down, so limit loan applications. Make sure you pay your existing debts on time. If you’re struggling to keep up with the repayments then think about taking out a debt consolidation loan.
Close any credit cards you no longer use and reduce the limits on those you still have.
While there are some expenses that you cannot change, you may have room to cut down on your costs. Review your budget and see if you can reduce your spending.
You may have some expenses that you can cut such as private school costs or clothes. Look for cheaper alternatives to increase the money that you have left over after each pay cycle.
Increase your savings
After you have cut down on your spending and reduced your debts you will be in a better position to save money, which will help you get a deposit together to purchase a new property.
Savings are favoured by lenders as they indicate that you are less of a risk than someone without them. If you already have investment properties then see if you can save the rental income to help fund your next investment property.
Before you purchase your additional properties try to aim for positive cashflow so you have greater flexibility to fund future properties rather than paying for the purchase out of projected rental income.
If you are unable to build your savings with your existing income and cutting back on your spending consider taken out a second job or starting a side hustle. Side hustles can add an extra few hundred to a few thousand dollars to a person’s income each month. That will put you in a much better position to purchase your next investment property.
Choose a lender with an attractive interest rate
It may be tempting to stay with your existing lender out of convenience but it may not be the best deal in the market. Shop around for a cheaper lender, or one that will lend you more money to purchase another investment property. Increasing your borrowing capacity will give you greater choice on where you can buy and could lead to better rental yields.
Pros and cons of being with the same lender
There are pros and cons to being with the same lender. Your existing lender may give you a good interest rate because you do all your banking with them but if you default then they have the ability to seize your assets. That includes bank accounts, your current property and your future wages that are deposited into the bank. Borrowing from the same lender may increase the serviceability buffer that is required which in turn will reduce your borrowing capacity.
Borrowing from the same lender means that your loans are probably cross collateralised against each other. It means that more than one property is used as security. The risk with cross collateralisation is that if there is a drop in the market your lender may force you to sell your property to pay off the debt. The other pitfall is that if you sell the property, and make a profit, the lender could use that additional cash to pay down the debt. That would affect your ability to purchase a new property.
There are pitfalls to borrowing from a different lender. Your interest rate may be higher because you are with multiple lenders and you could pay greater fees than if you were with just one lender.
If however you have cashflow issues then only the property that the bank has security over is impacted, so you don’t have to worry about the possibility of losing all your homes.
Main takeaways
The main takeaways if you want to buy three properties in a year are that you need to show lenders that you are in a good financial position for them to lend you money. They will only lend to borrowers they consider to be a low risk. That means reducing your overall consumer debt, paying down your existing mortgages and increasing your income if you can. With these actions you should be in a good financial position to purchase three properties in a year and hopefully have a positive cashflow.
To buy three properties in a year, you’ll need to plan and budget accordingly. Here are some steps you can follow:
- Determine your budget: Decide how much you can afford to spend on each property and determine your overall budget for the year.
- Get pre-approved for a mortgage: This will give you an idea of how much you can borrow and help you when making an offer on a property.
- Research properties: Look for properties that meet your budget and investment criteria, such as location, rental potential, and condition.
- Engage with buyers agent or a real estate agent: Buyers agent or a real estate agent can help you find properties, negotiate prices, and handle the buying process.
- Make an offer: Once you find a property you’re interested in, make an offer based on your budget and the property’s value.
- Close the deal: After your offer is accepted, complete the necessary paperwork and close the deal.
- Repeat the process: Repeat the steps for the remaining properties.
Note: You may also want to consider seeking professional financial advice before making any large investment decisions. If your goal is to have financial freedom through properties, you need to work closely with your accountant, financial advisor and mortgage broker.
