Small steps, big impact.
Why anything is better than nothingš¤
The property market has a habit of making the worst and most inexperienced investors look good so long as they hold their properties long enough. It is important to remember that a property purchased today that meets 90% of your criteria, is still better than a property you never get. You have to be in it to win it! If you donāt actually own a property, you have zero chance of making money from real estate.
Remember, good property investors donāt just buy properties, they buy time.
They set themselves up with the right structures so that they never have to sell and can keep the property forever. That way it doesnāt matter what happens to the market in the short term, because in the long term, they are guaranteed to end up in front if they hang in there long enough.
Beware of joint ventures when investing in property.
In property investment, a ājoint ventureā is usually referred to as a situation where two parties combine to purchase a property. Examples may include a brother and sister, friends, or parents and their children, where all names are on the title and all parties are joint owners. Whilst this may sound very tempting if you are struggling to get into that first property, it should be avoided.
The problem with joint ventures (JVs) is that if you are in a JV with someone, your bank assumes that you owe ALL of the money owing on the property, including all of your partnerās debt and this dramatically reduces your borrowing capacity. To add insult to injury, whilst they assume you owe all of the money, they will still only credit you with your share of the rent received.
The banksā reason for doing this is that if one of you falls over financially the other will have to pay the bills. So when it comes time to buy your next property no one will lend you any money because you are overcommitted to the first property in the bankās eyes.
If you are going to go into a JV just to get started, the best thing to do is have an agreement between both parties that at an agreed point where you expect some equity to be available, either one party will buy out the other, or both parties will sell the property. They should never be a long-term thing.
How do you build a $2 million portfolio? From the ground up!
STEP 1. Buy That First Property
The hardest bit is getting that first property. Letās say we start by buying a $400,000 property with a 90% loan of $360,000 from Bank āAā as our first property.
STEP 2. One Becomes Two
Now with the hardest part done, we have waited for the property market to work its magic and the value of the first property has grown to $500,000 and the rent will have increased too. Now we know that the banks will lend us up to 90% of the value of a property so our new ā90% lineā is at $450,000. So if our mortgage is only $360,000, we have up to $90,000 in available equity we can access to get us to our next property.
Now we simply go to Bank āAā and ask for a second loan of say $60,000 against the first property. We can afford extra debt on that property because we are now receiving more rent. We use the cash from that loan to pay the deposit and costs on our next investment property.
Then we ask another lender āBank Bā to give us a loan for 90% of the new property. So one property has now become two without using any of our own cash.
STEP 3. Two Becomes Four and So On
Letās say we did our homework well and it took two years for our first property to increase in value to such a point that we could leverage another property off the back of it, and one property became two. So then another two years or so later we can expect our two properties to continue to grow, and then two become four! Another cycle later four become eight, eight become sixteen and so on.
So now you know how to build a $2 million portfolio rather quickly and can appreciate how some property investors manage to accumulate massive property portfolios. You see property portfolios donāt grow at the same rate. They grow exponentially (one becomes two; two become four; and so on). You add properties faster and make money quicker the longer you have been doing it. The hardest bit is just getting that first one! So if youāre not in one yet, start doing everything possible to do so!
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~Integrity Team
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