How to Build a Property Portfolio from Nothing

Unfortunately, while researching this topic one thing has become clear – you cannot invest in property (or buy a family home) if you have nothing. If you have no income, no cash and no equity, then contrary to the titles of many articles out there (like this one!) you will never find any lender that will back you.

Everyone dreams of having a healthy property portfolio. But the reality is you need something to start with. Traditionally, the something you need is either equity or cash or both and an income. In recent years however, a new product has emerged from the lenders called a “no deposit investment loan”. This type of loan has some strict requirements, and includes using a guarantor that has enough equity to cover the loan.

There are some other ways to circumvent having no deposit or equity. One that comes to mind is in the form of builder/vendor financing. If you’re in the space of a building a new home, then this works by having the builder purchase the land and pay for the building. Once completed, there is an expected level of equity in the property that can the be used to obtain finance and consequently pay the builder for the property and the building. Of course this would come at a premium and I’m not sure that this concept ever made it to market.

Moving on.. Referring to the title – “from Nothing” – in the context of this article doesn’t mean you’re a poor bugger on the streets with no house, no money and no job, it means that you do not yet have a property empire, i.e you are yet to enter into the property investment market.

If you’re still on the fence about investing in property, here’s one piece of advice about property –  the sooner you get into the market the more money you will make. Here’s a great resource for lurking around and asking questions that might help – www.propertychat.com.au.

Work Out Your Strategy

Go hard or go home. Not sure how appropriate this cliché is here but it’s worth considering. Are you really going to get into this property investment thing and grow your empire? Or do you think you might get stuck at 1 which won’t ultimately make you a gazillionaire.

Assuming you want to go hard the next steps are working out your finances – even if it’s at a rough “ball park” figure by a mortgage broker or bank, you can work out details later but for now you know you can move forward.

Now research, and research, and research. Learn as much as you can. Do some paper trials. Figure out what works for you based on what you want to achieve, how much time you can put into this and of course how much you can start with.

You’ll need to discuss strategies with your accountant (who needs to be experienced in property investment accounting) and engage  your solicitor at this point.

So far, this is all work required just for your first investment property. But relax, it will get easier with your 2nd, 3rd and 10th time. If you do the work now and get your strategy well defined, subsequent purchasing processes will be easier and naturally you will refine the strategy as you go according to what’s working and what’s not working for you.

Financing Your Second And Subsequent Investment Properties

Here’s the crunch. This is what you’ll need to determine from the outset – how are you going to finance your second investment property. Work that out and have plan, then subsequent investment properties can follow the same strategy.

You’ll need to have a good idea of real world metrics for your plan to work. This comes back to doing your research and learning and doing paper investments. Get a realistic picture of what your first investment will look like financially. It’s worth noting, that your strategy for financing your second property may influence your strategy for your first property.

It’s also important to remember – how you finance property number two should be able to be applied to property number 3, and so on. To reiterate – you want your strategy to apply as much as possible to future investments so that you have a working system which will facilitate your property portfolio growth.

Obviously there’s no “one size fits all” solution. But there are common options, and reviewing them and picking one and maybe customising it for your personal circumstances is a starting point.

The ideal situation will be one of where your first investment property can fund your second investment property, the second funds the third, and so on. All properties are positively geared, and you personally never have to inject funds (apart from the initial investment obviously). To achieve this ideal scenario, you’ll need maximum capital growth in each property, and maximum positive gearing.

Another option could include saving the 20% deposit each time, if you’re on a good income. It will take discipline but you’ll reach point where you have enough properties that you’ll no longer need to save and your portfolio will fund it’s own expansion (ideally).

Some more options include;

• If you’ve renovated your first investment property, you maybe able to flip that for a good profit which could be the deposit for one long term investment property and another investment property to flip to fund another long term investment property. And so on.
• Plan for capital growth, research high growth areas and look at the property growth cycle. Use this to your advantage and purchase in high capital growth areas.

Remember the facts;

• Most lenders lend around 80% of the property value. This is ideal for them making the loan application easier for you.
• This means you need 20% deposit, either in cash or equity.
• Lenders will consider up to 80% of a verified rental income to help service the loan.
• You can opt for an interest only loan which will reduce your mortgage repayments and help cash flow. The negative here is that capital growth will be slower.

Location Research

Location, location, location. Hahaha. How many times have we all heard this.

Spend time researching your local areas. You’ll already have a good idea about local suburbs and their property values and demographics, facility locations and level of access to public transport, schools, hospitals, etc. See what’s selling, see what’s on offer, and monitor how quickly places are being bought. Talk to some real estate agents and find out what rental occupancies are like.

Once you’re familiar with researching your local areas, branch out a bit and have a look into some not so local areas. Get online, the forum posted above is a great resource to ask where people are buying at the moment. But please please do your homework – people online don’t always have your interests at heart.

Again, do some paper investing – pretend you did invest in a property, record how much it sold for, how much rental it’s getting, estimate capital growth and see how that works out in relation to your strategy.

Support; Family & Friends

If you’re going at this alone and are confident in your confidence that you can handle it, then good luck, well done. If you’re not so confident, enlisting the help of family or friends is not a bad idea. For one, if you go into partnership with someone, it will lower the barrier to entry for you, i.e. everything will be half as much. Secondly, having a partner to shoulder some of the responsibility can be a huge stress relief at times.

Even though your income/profits will be split, it may mean your investment portfolio will grow at a speedier rate with double the resources to throw at the partnership. It’s also easy to blame your partner when things go wrong.

Make The Commitment

When you think everything is order, go and find that ideal first investment property. The word “ideal” is used loosely here, what is ideal for you may not be ideal for the next person, so make sure it fits your plan and strategy.

If you’ve done your homework thoroughly, the decision making process shouldn’t be too difficult when you find the ideal property. You’ll be confident, it will tick all the boxes, and you’ll know exactly what to do.

Go ahead, make the commitment and jump in!

Make The Offer / Negotiate The Price

This a point where your confidence will be tested. Real estate agents are fine negotiators and will be playing for the seller, not you. Obviously, the more you can negotiate the price down, the more money you will make. Spend some time looking at details of the property (physically, not on paper) – find as many faults as you can which can used as negotiating points. Present your case, your offer, and be prepared for a counter offer.

Make sure you have a limit to how high you will go. There will be other interested parties who may be willing to offer more than you so don’t get emotionally involved, stick to your limit and if you miss out, happily walk away from this one and start looking for the next one.

That’s Investment Property Number One!

Hopefully, after jumping through all the hoops, waiting the settlement period, you’re now the proudest property investor on the planet.

Now that the property is yours, it’s time to execute your plan. Whatever it is, don’t wait long, get started straight away. If you’re renovating, get in there and get it done. The sooner the renovations are done, the sooner you can start earning an income. More importantly, for your portfolio growth strategy, the sooner your equity will increase.

Property Number Two

Whilst you’re going through motions with your first property, start thinking about your second investment property. All the considerations are the same, i.e. finances, accountants, solicitors, where and what to buy, etc.. However, because you did you strategy planning very thoroughly, you know exactly how this is going to play. And you’ve already just done it all first your first investment.

The second time around you will know what to expect and how to improve on the first round. Ideally, things have gone to plan and your initial strategy stays in tact and looks very plausible. Kick in that plan and start working towards your second investment property.

Finally

Research and planning will go a long way into making your portfolio a successful one. The key is to develop a plan that suits your circumstances and can be repeated and repeated steadily and consistently. In other words, you’ve created your own property portfolio growth system.