Property 101: Building a Portfolio
Building a Property Portfolio
For most investors, a couple of investments is all they need, provided they start early enough, but whether you want to own two or two hundred, it’s helpful to understand the portfolio building cycle, and it’s really quite simple.
Buying your first home is where it all starts, and it’s the hardest thing to do. You have to rely on saving cash for a deposit, but from then on, acquiring property gets a lot easier.
What is Equity?
After owning your home for a while, you’d expect it to have increased in value. The home you paid $400k for a few years ago is probably worth at least $600k now. You’ve made a $200k gain, regardless of whether you’ve paid down any of your mortgage.
We call this equity. Equity is the value left in your home, after your mortgage is paid off, so the more your property increases in value, provided your mortgage doesn’t increase too, the more equity you have.
The Snowball Effect
To access that equity, you don’t need to sell your home. A valuation is all you need to prove to the bank that you have this equity available, and there’s a good chance they’ll let you use the remainder as a deposit on a new rental property.
Once you have two properties; your home and a rental, you can double the rate of acquisition, as you’ve now got two properties increasing in value, to be revalued and remortgaged in the future.
It’s that simple. Use your existing properties to buy another, then wait for values to increase so you can borrow more against them.
The “Buy, Wait, Revalue, Repeat” Cycle
So you own your home, use that to pay for your second, then use both of those to pay for the third. When you have three properties increasing in value, things start to happen very quickly. You’ll be onto your fourth or fifth in no time.
It’s a cycle of buy, wait, revalue, repeat, and provided you can maintain a balance of good equity gains and enough rental income to sustain your ambitions, it gets easier, faster and even more fun!
NB: This is an over-simplified explanation, to illustrate the basic principle of growing equity to support additional property purchases. There are several other factors – most notably servicing calculations – which also need to be considered before any lending can be obtained.
Be proud of yourself for getting on the ladder to begin with. You’ve already done the hardest part. The next part is much easier.
Keen to get started? Learn more at our next property investment event.
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