Property investments in Sydney, Melbourne and other Australian cities have increased dramatically in recent years. Many investors have created substantial portfolios.
Gen Y Investors, who often have large investments worth millions of dollars, are also a highlight.
Is it possible to be as wealthy as you think?
In order to answer this question, it’s important to understand how investors manage to purchase properties in the first place.
To get on the property market, you will need to make sacrifices
It is difficult for first-home buyers and investors to purchase their first property.
This stage is the most popular. You can save substantial cash, or you can use a parental guarantee to pay a deposit. Most buyers and property investors will need to save more money than they can afford to put down for the deposit.
However, it is important to know the difference between buying a home and an investment property.
Even though investment loans have higher interest rates now than ever, lenders consider investors more reliable than owners making the same income. Investors could also benefit from tenants living on the property.
Macquarie analysts did research last year, and discovered that a person earning $105,000 per monthly could borrow $813,000 to invest in property instead of $588.389 to be an owner-occupier.
Investors have the option to buy in areas with higher growth potential, and can borrow more. First-home buyers need to be cautious about where they live and work.
Investors may also be able to buy less expensively in areas with lower deposits. By purchasing cheaper properties, they’ll be able to buy more real estate in the future.
While every investor has a different approach, let’s assume our investor bought two apartments five years ago in an area favoured by investors, such as Sydney’s western suburbs, for $250,000 each (such prices were achievable in 2012).
To grow your portfolio, you need equity
An investor should not spend more money in order to save for a deposit on their next home. Instead, they should make use of the equity in their properties as soon and as possible. This could be as simple as waiting for the market value to increase, or paying back a loan.
Home equity is the balance after subtracting the amount due for a home mortgage from its current value. With our investor’s two $250,000 apartments, the revaluation is likely to be $350,000 today ($700,000 in total), using a conservative estimate.
Our investor required a $50,000 deposit to start the process. Her total loan was $200,000 ($400,000).
Although she didn’t allocate additional funds to pay the properties off, her $100,000 worth deposit (2 multiplied with $50,000 each) was turned into $300,000. In theory, she also received an additional $200,000 in revaluations. The portfolio would now be worth $700,000. This would mean that the portfolio would be worth $700,000.
To pay more costs and deposits, the investor could take equity out of these properties. This approach could be used multiple times to expand a portfolio beyond the 10-property mark, provided the investor doesn’t hit a “serviceability wall,” upon which the banks will no longer lend.
Making money by investing
If she decides to buy a $500,000 investment property with her equity, she could add another property to her portfolio.
Her current portfolio is valued at $1.2million.
But if our investor sold her portfolio, she won’t walk away with $1.2m. It’s unlikely she would be able to walk away with $1.2m even if she did get $300,000. This is equity plus initial deposits.
Selling and capital gains taxes can quickly reduce the remaining value. Add to that the cost of maintaining the property (including shortfalls in rent and mortgage repayments, as well as improvements to property, insurances, etc.). The remaining value could quickly drop.
Investors won’t be selling at this point. For future returns, many investors will pay more for an investment property than the rent they receive.
Investors in property tend to purchase properties with the long-term goal for growing their portfolio. However, if this growth doesn’t occur, they could be losing money due to the holding costs. If property values decline, investors could end up paying more to mortgages than what they are worth.