Where do I start? Working your way up the property ladder

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The question that I am frequently asked at seminars when it comes to investing in property is...exactly where do I start? Do I buy my home first or should I start with an investment property?

Well, let me try to answer this simply yet provide you with some easy tools to begin your property investment career and create a successful portfolio.

First things first – buy your own home

Owning your own home is the first step most Australians should take on the property ladder.

I know that with the market the way it is today some readers will be concerned as to whether they can even afford this baby step.

The key to making this happen is to keep it realistic! Okay, perhaps you can’t afford the new, luxury house you had in mind, but we all need to start somewhere. And you may be able to get there a bit sooner than you think by taking advantage of the first home owners grant.

Keeping your first home goal realistic and within budget is possible – you may just have to lower your expectations a little. Perhaps you could consider a property that needs a bit of work done to it or buying in a suburb adjoining the suburb you first thought of buying in if your ideal location is a little too pricey.

Often by buying a property to which you can add value or by buying in an upcoming area, you can get your foot in the door at a good price. You may then find that within a year or two, you’re sitting on a property that has earned you equity. Equity is the amount of home you own outright less the mortgage.

So if your home increases in value because you’ve made some improvements or the area it’s in has experienced good growth and at the same time you’ve been making repayments to your mortgage, your home will be worth more and therefore you will have extra equity to fund your first investment property!

Stepping out as a first timer

Not many of us are easily able to save the deposit for that first investment property, so chances are you will have to re-mortgage, in other words borrow against the increasing equity in your own home.

You should not do what the majority of us were taught by our parents and just keep paying off our home.

The reason many people never get started with property investment is because they are too scared to take on more debt and borrow against their home. They often think - “I’ll pay off my mortgage before I take on more debt.”

This is a thought process that will sabotage you if you let it!

Again, the key is to be realistic about what you can afford and when you can afford it. I would never suggest that first time investors get in over their heads, but you have to make a start and leap frog off this new equity you have built up.

Servicing the debt on your first investment will be easier than paying off your home loan because if you structure it right both the tenant and the tax man will help you make your mortgage payments. The tenant does it by paying rent and the tax man hlps through depreciation tax benefits.

The criteria you use to buy an investment property are different to those used when buying your home. You choose your home with your “heart” and its natural to make some emotional decisions. But you should choose your investment with your “calculator” based on sound financial considerations. And if you if you feel stuck seek professional advice. Consider using a buyer’s agent who is specializes in property investment.

Consider buying your first investment in an area that has good capital growth and perhaps something that needs minor cosmetic improvements that will be attractive to tenants, near all the right amenities and will therefore always rent and re-sell well. It doesn’t have to be a house. You could consider buying an apartment in a great location that tenants will be scrambling to rent from you.

With these key ingredients you can’t go wrong. Again, just make sure the numbers stack up, you can afford the commitment and you’ve done the necessary research to pick a winner!

Just remember the ingredients to success – good location, scarcity value of the property itself and popularity of the property and the area to both tenants and owner occupiers.

Of course, once you’ve spruced up your renovation project and added substantially to its value, it’s time to step onto the next rung of the property ladder and re-finance this investment. This may be easier than you think as you will now have increasing equity on two properties – your own home and your first investment.

Don’t stop there – keep moving on up!

Now that you have a mini portfolio, your options suddenly increase. With a few properties working for you and producing equity the key is to keep the momentum going and take more steps up the property ladder.

The big problem for many of us is servicing the loans on these investment properties. If you buy well located properties in areas of sound capital growth, even in today’s markets where rentals are rising, the mortgage payments and outgoings will add up to more then your rental income.

This is where some smart financing helps. Many smart investors access the equity in their home or investment properties to help pay for the deposit for the next property as well as to service the debts on their loans.

There are many loan products on the market investors often choose a ‘line of credit’, which is a bit like having a big credit card. They have the capacity to borrow up to its limit and just like a credit card; they would only pay interest on any money they have borrowed on their line of credit, but not on the unborrowed limit.

But unlike a credit card, they don’t have to find money for interest payments. Any interest due each month can come out of their unused credit limit. So at the end of the month they pay their interest bill by increasing their loan amount to pay off the interest and the next month they pay interest on the new larger loan amount. This means they don’t need to find any spare cash to pay the interest until they reach their credit limit.

Effectively they are borrowing 100 per cent of the purchase price of their first investment property.

The sky’s the limit – building your portfolio

By now you have nothing to fear. You know the rules of the game, you’ve successfully bought a handful of properties that are all gaining value for you year in, year out and there’s no stopping you!

Just remember to always work within the realms of financial reality, do your research, focus on the rules of investment and you should be the proud owner of a successful property portfolio before you know it.

It’s also important to get your tax structure right. Make sure you know exactly how you will hold the properties (eg. as an individual investor, in a trust, etc), how you will organise finance, legal aspects, taxation and the like.
Remember – take it step by step up the property ladder and you‘ll make it to the top…without falling off!

http://www.realestate.com.au/review/nov07/where-to-start.html