Here are a few thoughts for those of you who have already have an investment property or two and are looking to increase your portfolio with further investment properties.
a) Have you got a plan that you are following?
b) Is it written down and costed out?
c) Do you know the attributes of the next property that you want to purchase so that it is in alignment with your plan?
- Equity/Deposit - Where are you accessing this money from?
a) Are you using additional equity in your home?
b) Do you have sufficient equity in an existing investment property?
c) Have you considered how to stretch your equity by using mortgage insurance to lower the amount of deposit you require?
- Borrowing - Do you know if you are able to borrow enough money to complete your next purchase?
a) Are your current loans structured correctly to enhance your position?
b) Will you use your existing lender for the next loan, or are there better options for you? Will this mean refinancing your current loans(s)
c) Do you know how to enhance your borrowing capacity?
It is not uncommon for people to have arrived at their first investment property almost by accident. By that I mean it often comes about by deciding to purchase another property and then keeping their existing property and renting the property.
They would then typically use the equity in their existing property to assist with the purchase of their next home.
Whilst this is not always ideal as the loans in terms of maximum tax effectiveness are often the wrong way around ie the new owner occupier home loan is high and the existing investment loan is low. The advantage in this is that the cashflow of the investment property will be good as the loan is low and will not require such high loan repayments.
NB: Remember in most cases it is the purpose of the loan that is important for tax deduction purposes, not the property that it is secured on.
If you have procured your first investment property via the above method and are now serious about adding further investment properties to your portfolio, then the steps outlined above are a good place to start.
Of particular importance is the planning stage. Knowing what you are trying to achieve is the first step in getting there. It is quite often the hardest step to take. It forces you to think long and hard about what you goals are; in simple terms this is how much and by when. This goal may be thought of in terms of passive income goals, or net worth goals. That maybe that you want to have a certain level of passive income per month, or that you want to accumulate a certain level of net worth, which you may then turn into an income source.
At some point if you are looking to replace part or all of your income with investment income the results need to be considered in terms of income.
As you get clear on your goals, the number and types of properties required to achieve your goal will start to become self evident. At this point you may have a reality check either in terms of your actual end goal, or more commonly the time required to achieve the goal. But, this is all part of the planning process. You get clarity on your goals and then work out what you need to do, which may require some changes in your thinking and/or lifestyle.
Your particular set of numbers will have a significant impact on the achievement of your goals. By that I mean your current asset/liability and income/expenses. Will these support your goals or are you going to have to make changes to achieve your goals.
Again, working through the points above will help get all your information together before you start buying more property.
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