Step 2: The Art of Accumulation. Building your financial foundation
Let’s say, for example, you’re buying your first property with a value of $400,000 and a 90% loan of $360,000. However you’ve raised it, you put down a deposit of $40,000 plus $20,000 for costs (stamp duty, legals, LMI, inspection, etc.)
Figure 1. Breakdown of costs to buy a property
Once you’ve secured the first property you don’t need to save anymore. Well, you should be saving money on principle so that you’re not living beyond your means, but you won’t be saving money towards a property deposit anymore. What will happen instead is that the value of your property will increase and at the same time the amount of money you can borrow against it will increase too. This is called the Loan to Value Ratio (LVR) .
The LVR can be calculated by dividing the loan amount by the value of the asset, that is the mortgage amount divided by the property’s value. In this case, $360,000 ÷ $400,000 = 90%.
If the mortgage remains the same at $360,000 but the property’s value has increased to $500,000 then an LVR of 90% will take the limit up to $450,000.
Figure 2. Increase in property LVR limit
This property has a $360,000 mortgage on it, but the limit is $450,000 since the property value went up. This means that there is available equity, that is, there is money you can pull out.
You can take out a second loan of up to $90,000 against your first property and use it for a deposit on the next property.
Figure 3. Using existing property equity to purchase a new property
As you can see, the first deposit is the most difficult one to get.
Thereafter, your investment properties do the work for you. You’re going to be on this earth for about 80-90 years, so if it means living like a pauper for just one year because you have no family support, then that’s what you need to do to get into this game. Your only aim is to get that first property.
Then what will happen is a snowball – one property becomes two and two becomes four and so on. That is how you grow your “orchard” and build your empire. It’s really that simple to start building and growing your investment property portfolio.
Figure 4. Growing a property portfolio
Many people want to get rich quickly, but this is not a get-rich-quick scheme. It’s a get-rich-slow scheme. But, it’s a get-very-rich-slow scheme. Property investing can make you very wealthy. You simply need to start applying these principles and executing them. It’s your choice. Don’t be that person who is still spinning their wheels in 20 years, wishing you’d taken action today.
Next Up we are taking a look at 3 Golden Rules for property success!
~Integrity Team
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