If you own a home and are thinking about diversifying your investment by building a property portfolio, it may not be as difficult as you imagine. For some home owners, the equity in their current property can be enough to invest in a second property.
Equity is the difference between what your property is worth and your remaining mortgage balance. So if the value of your home has increased since you bought it, and in that time you’ve also paid off a chunk of your mortgage, you’ll have built up equity that you may be able to leverage to buy your second property.
If you’re already in this position or are working towards it, here are some steps to help you start building your portfolio.
Speak to your bank
Your mortgage lender or bank can help you find out what your property is worth and how much equity is in it. If you’ve only recently purchased your property you may need to give your equity some time to grow.
Once you have enough equity in your property, you can use that as a deposit for your next property. Be upfront with your lender or bank about your plans so they can help you structure your home loan to keep ‘recycling’ this equity to purchase more properties. This is particularly important if you’re yet to buy your first property – if you have a second property in mind from the outset it will make things simpler down the line.
Define your investment strategy
When it comes to owning investment properties, are you looking for rental yield or capital growth? Ideally you’ll have a strategy in place that delivers both, but this is not always possible. If income is a bit tight or your job isn’t so secure, you may want to prioritise rental yield as this may provide you with some security should something happen to your income.
Broadly, a positively geared property means that the gross rental income is greater than the ongoing costs of owning the property.
If you’re on a higher income, you may choose instead to prioritise capital growth because you’re confident you can cover the cost of the mortgage. Some investors choose to negatively gear their properties to reduce their tax payment at the end of the financial year.
Negatively geared properties are those where the rental income is less than the loan interest repayments and outgoing costs, ultimately reducing your total taxable income and therefore the amount of tax you have to pay.
Pick your property
Once you’ve decided on your investment strategy you can begin looking at what properties are available on the market and where you want to buy. You can start by searching for properties through our CommBank Property app. And our home loan calculators can help you work out how much you may be able to borrow and what your repayments will be.
Make sure you budget for all the costs that come with owning an investment property, such as council rates, management fees and home insurance for landlords as well as periods in which the property may not be tenanted.
You also want to factor in the possibility of an interest rate rise. Calculate whether you would still be able to make the necessary repayments if interest rates were to increase by, for example, two per cent. If you don’t think you could, you may find you’re overcommitting yourself and might instead want to look at a cheaper property or saving for longer.
Plan for the long term
Building a property portfolio requires commitment over the long term. Some property experts advise that in order to see the biggest benefit from capital growth, you should hold on to your property for at least seven to 10 years. Every situation is different of course, but the longer you hold onto your property or properties, the more likely you’ll be able to ride out any downturns in the market cycle.
Remember that nothing is guaranteed and there is always risk with any investment in property. It’s important to make sure you do as much research as you can to reduce the risk of something unexpected happening.