Going from small time investor to major player

Before making the decision to buy your first investment property, you must first overcome the psychological hurdles that are driven by fear and uncertainty. Yet, after you have dipped your foot in the water once or twice and are looking to expand your portfolio, those mental barriers seem to disappear, only to be replaced by new barriers that are more physical in nature. Perhaps you can’t obtain finance, or don’t have enough equity to fund a deposit. Or maybe you just don’t know what to do next.

Whatever it is that is stopping you from expanding your property portfolio, you are probably not alone. Many people never go beyond owning more than a couple of properties. So, how is it that a few people are able to build substantial portfolios while others get stuck? What’s the missing element?

There are actually a variety of factors at play but once they are understood and applied, they can dramatically improve your ability to move from a small-time investor to owning a massive portfolio.   The key is not just to do one thing right but a whole series of things (there is actually 12 steps in all). It’s about not only overcoming the hurdles you face today but also putting the right strategies in place to make sure others don’t appear in the future.

If you don’t yet own an investment property, this information is just as critical to you as to those who already face the barriers I am discussing. Why so? Well, the decisions you make regarding your first investment property can play an enormous role in determining when (or even if) you build a substantial portfolio.   

In this article, I will focus my attention on one of the key factors in building a big property portfolio: equity. To build a massive portfolio in as little time as possible you need to create as much equity as you can as quickly as you can. So what can you do to give yourself the best possible chance to build enough equity? Let’s discuss some strategies.

Setting yourself up for maximum equity

It might seem obvious to some but to maximise your equity growth you need to buy in a location with a proven performance and great potential for growth. You will also need to make sure you choose the right type of property for that location, one that will be in demand by owners and tenants. Ideally you will buy the property below market value but remember that you will be far better off with a good quality property that is priced fairly than a poor quality property purchased at below market price. Basically, the goal is simple: you want to start off with as much equity as you can and choose a property that will achieve above-average growth while you own it.

Maximising your equity potential 

When the time is right (it might be straight away or within the first few years), you should look at carrying out a suitable renovation or redevelopment project on your property. This could be as little as repainting it and fixing the gardens or something more substantial such as building an extension. Remember that when deciding what work to undertake, you cannot afford to overcapitalise. In other words, you shouldn’t spend money on the property that will not generate an adequate return. Find out what the potential ceiling price would be for your property (after renovation) by reviewing recent sales evidence and then research whether the cost of the renovation will be less than the value you will be adding to your property. It’s important to consider all costs (including things like council fees and interest payments if necessary) and not to fool yourself into thinking you made a profit. Not every property is a suitable renovation candidate so it’s important that your initial choice of property has been considered for any potential renovation.

Accessing your equity

If the renovation was successful (i.e. you have added value beyond what you have spent) and the property has achieved natural growth, you may now have equity in the property that you can access for further investments. You need to approach your lender or broker and tell them that you would like the property revalued in order to increase your loan and access any additional equity. Your ability to do this depends on whether you have structured your loan correctly in the first place (a topic covered in other articles) and whether you can meet the necessary lending criteria. A good broker should be able to help you to overcome most hurdles.

Repeat the process to exponentially grow your equity

Assuming you have been able to access the equity in your property, you can now use the money as a deposit to purchase another property. If you bought right in the first place, the original property and subsequent properties should continue to grow year after year and provide a growing source of equity to continually expand your portfolio. Effectively you are moving your equity around to increase the size and value of your portfolio. 

Do you really need a massive property portfolio?

Some people question the merits of spreading out your equity amongst multiple properties. Is there really a difference between having one property with $400,000 in equity versus 4 properties with $100,000 each in equity? The answer is a big YES and it’s all because of the power of leverage, which we can demonstrate with a quick example. Let’s compare one investor who has a $500,000 property with an interest-only loan of $100,000 (i.e. equity of $400,000) and another investor who has 4 properties worth $500,000 each with interest-only loans of $400,000 on each. Both investors have the same amount of equity (or wealth).

But look at what happens to each investor’s wealth position as the properties grow in value. Let’s jump ahead 10 years and assume that all of the properties have doubled in value. The first investor now has a $1 million property with a loan of $100,000 ($900,000 in equity), which sounds great. But the second investor now has $4,000,000 worth of property with the original $1.6 million in loans, which equates to equity of $2.4 million! It’s easy to see the power of leverage in action. Now, it’s true that the second investor would have had to fund his properties over those 10 years (as they would likely be negatively geared). But even if it cost him $100,000 over ten years, that’s a drop in the ocean compared to the $1.5 million in additional equity that he has gained.  By leveraging your equity, you are able to build more wealth quicker and reach your financial goals sooner.      

Although we have only scratched the surface, it’s easy to understand the important role that equity plays in building a massive property portfolio. But equity is only one consideration in a much bigger picture. For instance, how do you fund a large portfolio? How do you maximise your tax benefits while protecting your assets when you have a large number of properties? If you want to learn about all 12 steps you need to follow to greatly enhance your ability to own a substantial portfolio, why not attend our upcoming seminar titled ‘How You can Build a Massive Property Portfolio’ which we will be hosting in Perth and Melbourne during this month (March 2010). Click here to book your place or call 1800 000 159 for more information.   

Momentum Wealth and its affiliated entities are not Accountants or financial Planners. While all information is provided in good faith, you should seek your own independent advice in relation to all matters regarding investing, taxation and superannuation.


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