Five strategies to get your next investment property without selling
If you’re looking to purchase your next investment property then you don’t necessarily need to face selling up your current properties. In fact, there are a number of strategies that you can consider that will allow you to begin building a portfolio.
Firstly, ensure you can afford to hold multiple properties. While rental properties do return income, often an investment property can have vacancy periods and can involve you paying out for maintenance and to cover any shortfall in affording the repayments. If you intend to hold multiple properties then you must ensure that you are in the financial position to afford it. Speak to your lender about your serviceability to determine if your position allows you to borrow to fund your next purchase.
You may then want to have a closer look at your expenses and discretionary income to ensure that what you are able to borrow aligns with what you are prepared to spend each week to hold an investment property.
Sometimes, selling down an under performing asset can assist investors with the health of their property portfolio overall, particularly if it looks as though it may drop in value in the future.
Holding a property also means that you won’t be required to pay Capital Gains Tax, as this only applies after you have sold an asset. For those holding multiple properties, this may be a wise move to wait to offset your gains against capital losses at a future date.
If you find that you will easily afford the repayments and that holding is more attractive for you, then here are five strategies to consider that will boost you into your next piece of real estate without selling up.
1) Coming up with a cash deposit
One of the most traditional ways that property buyers purchase is through saving up a cash deposit. For investors, it may be that you have been able to put money away to do this, or have shares or other more liquid assets that could be sold off to help fund a deposit.
Deposit bonds can also be used if you have the money tied up in other investments. While you will need access to these funds when settlement occurs, it can provide you some leeway in the meantime. You may find that you can sell down shares or other non-property assets to come up with a bit of money or that you can sell some other extraneous items.
2) Using existing equity in your property
If your property has substantially increased in value over the time of ownership, or you purchased it for perhaps less than its market value, then you may be able to use this equity for purchasing your next investment property.
Estimating how much equity you have: The equation to determine equity is quite simple. You want to know how much the property is worth compared to how much you owe on the home. When you have taken the amount that you owe from the current value (you may want to consider a professional valuation for this purpose, however appraisals or market comparisons can be useful for your initial considerations) you are left with the equity.
Remember, you may not be able to use the full amount of your equity as a portion must be left in as security – around 20%. This may erode what you can spend on your next investment property, however many are surprised to learn the full amount their have available to use in their current property.
3) Renovating to refinance
If you do not have enough equity to refinance immediately, it may be time to consider a substantial renovation to boost the value of your home and obtain a higher valuation. While this may require a cash outlay, savvy renovators are able to add more value than they spend and thus use this added value to leapfrog into their second, or other subsequent, investments.
The main trick is not to overcapitalise, or in others words – don’t spend more than you will get back. Ensure you consider labour costs, your own time and the cost of materials, as well as holding costs if you are keeping the property vacant while you renovate, to have a clear picture of how much you will need to pay and whether it will stack up.
Look to other renovated properties in your local area to determine how much value you can add through a cosmetic or structural fix up.
4) Subdividing or developing the block
One other option that investors may consider is subdividing or achieving planning permission on the block and increasing the value in this way. Those who subdivide may be able to even build a second dwelling on that block, finance permitting, allowing an easy avoidance of those pesky in and out costs. You may find that undertaking this sort of development actually works out better financially than purchasing a dwelling elsewhere.
5) Purchasing as a joint venture
If you can’t perhaps afford an entire new property on your own, then it may be worth considering entering into a joint venture. Essentially, this is where you purchase with another person – each owning a specific portion of the property.
It doesn’t necessarily need to be a 50/50 split with another person, however remember to lay out your terms and conditions beforehand – how are decisions made around renovations, a future sale and the split of the capital growth? Ensure you know your liability around the full mortgage repayment, often regardless of the other person involved you will be considered equally responsible for the repayment of the loan.