Property investment can be a great way to grow your wealth, but it’s important to understand the market and plan your finances wisely. We’re proud to feature insights from Home Loan Experts mortgage brokers Robert Mo and Jonathan Preston. They bring you the essential strategies you need to succeed in property investment.
Whether you’re a beginner or a seasoned investor looking to refine your approach, this blog will equip you with the knowledge and confidence to make smart decisions.
Understanding Market Potential And Risk
Robert Mo emphasises the importance of looking beyond familiar territories when investing. “Investing is about numbers, not what you’re comfortable or familiar with. Don’t be afraid to invest in areas with lots of potential because it’s interstate,” he advises. For those new to property investment, Mo suggests getting a buyer’s agent to assist with the investment strategy.
Jonathan Preston adds that having a clear understanding of one’s risk profile and end goals is crucial. He explains, “Knowing your risk profile and end goals is critical before starting your property investment journey. You can work your way backwards, starting with what you want to hold at retirement and then reverse engineering how you can get to that stage with the resources you have.”
The Importance Of Loan Structure
Getting the right loan structure is imperative to maximising your returns. Mo discusses the benefits of opting for an interest-only loan structure: “Instead of paying off the principal, you have the option to go for an interest-only structure. This helps you build your offset facility. If you pay off the principal and the valuation drops, you will not be able to redraw those principal repayments. Paying into the offset facility instead of the principal will protect your future interests and allow you to purchase additional investments using the offset savings.”
For those who are more adventurous, Preston shared that you could increase your ROI by leveraging. He presents a detailed scenario: “Imagine you’re considering purchasing a $1 million freestanding house, offering a 3% net rental yield and incurring 1% holding costs for expenses like council rates and repairs. With a projected 7% growth rate, you’d anticipate a $70,000 capital gain alongside $30,000 in net rent. After deducting the $10,000 holding costs, your total return on this $1 million property would amount to $90,000, equating to a 9% ROI. Now, let’s explore the impact of leveraging through a 90% loan at a 7% interest rate on the same property, requiring a $100,000 deposit. In this scenario, you’d be liable for $63,000 in interest-only payments on the $900,000 loan. After factoring in holding costs and loan repayment, you’d be left with $27,000, representing an impressive 27% ROI.”
This example demonstrates how leveraging can significantly amplify returns. However, it’s essential to consider debt costs, too. If we adjust the example, assuming a 10% debt cost (a 10% interest rate), the ROI would plummet to 0%, underscoring the critical balance between leverage and debt costs.
It’s important to note that these examples exclude stamp duty, highlighting the need for comprehensive financial planning and consideration of all associated costs.
Common Pitfalls To Avoid
A vital tip from Mo is about managing borrowing capacity wisely: “One thing an investor should never do is max out their borrowing capacity on one property. If you’re maxed out, even if the property value has gone up, you won’t be able to draw on equity. Leave a bit of borrowing capacity for future investments.”
Strategies For Building A Solid Portfolio
Mo and Preston agree that diversifying investments is a smarter way to build a property portfolio. Mo suggests, “It may be better to diversify and split your borrowing capacity between multiple properties instead of being all in on one. This will allow you to access equity and purchase multiple properties to maximise profitability in the long run.”
Preston adds, “Trusts allow for more borrowing power for those who want to build a big portfolio. For those on the entrepreneurial side, strategies like subdivisions and adding flats could work.”