“Zoe and Ben” are a couple in their mid 30’s who looked into property investment. The first step for them was to understand:
- How equity can be used to build their portfolio
- How much equity they can extract from their property for investment purchase costsHow Zoe and Ben Started Property Investment:
Now we know with Sydney & Melbourne having grown substantially, you may have more equity than Zoe and Ben and be able to build a larger portfolio, you have to start with ONE purchase first.
Year 1 – Zoe and Ben purchased their home for $500,000 at 80% Loan to Value Ratio (LVR) i.e. when acquiring their home, they put down 20% deposit and 5% property purchasing costs. This required a cash outlay of $125,000 ($100,000 deposit and $25,000 purchasing costs), while the loan was $400,000 (being 80% of the purchase price).
This property grew 40% by the end of Year 5 (Note Sydney has grown 60 to 90% in the last 3 to 5 odd years, whilst Melbourne has grown more than 50%). Over the last 5 years, Zoe and Ben paid off $50,000 off their home loan, bringing it down to a loan of $350,000.
Year 5 – Zoe and Ben worked with their broker to arrange for a valuation of their home and realised a capital growth of 40% on purchase price, i.e. the new value for their property is $700,000. Given the current loan of $350,000 Zoe and Ben have $350,000 equity available in their property.
At 80% LVR (80% of $700,000), Zoe and Ben are able to take out $210,000 to fund their investment property purchase (80% of $700,000 MINUS the Current Loan of $350,000).
For $210,000 equity drawdown, at 88% LVR….
- They parked 20k for buffers (for future maintenance / rate rises etc.)
- A deposit of 12% and buying costs of 5% [17% total purchasing costs]
- $190,000 / 17% = $1,1176,647
Zoe and Ben can purchase investment properties worth approximately $1.1 million (assuming Zoe and Ben have sufficient income to service the loan). To spread the risk, Zoe and Ben decide to buy TWO investment properties for $550,000 each, in two different areas.
Note – the LVR on the new purchases is 88%, as this is considered a ‘sweet spot’ to maximise access to Other People’s Money (OPM) by paying Lenders Mortgage Insurance (LMI), which we regard as a cost of doing business. LMI on investment purchases is tax deductible over a period of 5 years.
This will provide Zoe and Ben with…
- Two streams of rental income, rather than relying on one rental stream to cover the holding costs for the properties.
- Maximising exposure to the market. If they choose to use $190,000 to purchase at an 80% LVR, they would have purchased a $760,000 property. As a result of going for 88% LVR, and purchasing two investment properties, they now have an exposure to real estate markets of over $1.1 million (this is besides their home).
- 20% Capital Growth on a 760k property will provide a $152k in equity growth
- 20% Capital Growth on a $1.1 million worth of properties will provide a $220k in equity growth
Building a well performing real estate portfolio, to help you achieve your personal goals, requires strategic planning.
5 KEY TAKE AWAYS FROM HOW ZOE & BEN STARTED THEIR PROPERTY INVESTMENT JOURNEY
- They had lazy equity in their home to enable them to start their portfolio
- They had a clear goal to build financial wealth through property
- They realised that now is a good time to take action for them
- Zoe and Ben worked with an investment savvy mortgage with a focus on their long term goals and aspirations
- They ensured they worked with their broker to structure finance correctly so they can continue building on after their first 2 investment properties
Where are you in your journey and what’s the next step for you? If you are keen to start with one property or go for big goals and build a portfolio based on fundamentals, now is a good time to kick off your journey.
Property Twins are a mortgage broking business, who specialise in helping property investors Australia wide to build tailored property portfolios.
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