How to grow your property portfolio to generate long-term wealth 

By making use of equity and property leveraging, investors are able to grow their property portfolio, maximise income, and harness opportunity. Here I show how to use the power of equity and property leveraging to your full advantage. To explain how they do this I will focus on a buy-to-let investment strategy. There are other strategies you can use dependant on what suits you as an investor. A buy-to-let is a great strategy because you build wealth by using the rental income from your tenants to pay down your property’s mortgage. What is that monthly amount? Calculate it with our Monthly Bond repayment Table.

The tools of Leverage and equity

Property investment allows you to borrow the banks / someone else’s money to increase the potential return. This is known as leveraging because you don’t need to have 100% of the property purchase price available to purchase a property. Equity is the difference between the current market value of the property and the current debt (what is owed to the bank).  Where do you start with a bank proposal? Let us assist you with our bank financing proposal.

The power of the tools

To further demonstrate the power of equity and property leveraging, take this for example: if your property is worth 1,500,000 and you put down a 20% deposit. You owe the bank 1,275,000 because some of the deposit was needed to pay the bond registration and transfer duty. You then have 225,000 left as equity at the start of the investment. Over time the equity grows because as the investor pays off the loan the debt reduces. As the property appreciates the amount of equity also increases. Appreciation may be caused by a general market increase in prices or may be caused by improvements made on the property. Investors are able to access the resultant equity for the purchase of new properties 

Let’s assume that the property appreciates by 10% each year, calculated with our capital growth calculator.. In 4 years time the property is worth 2,215,000. The loan was taken over 25 years at an interest rate of 10% so the capital portion of the loan still owed to the bank is 1,218,000. To work out the equity we must subtract the current market value from the current debt. This means there would be approximately 1,000,000 in equity after 4 years.  

Financing with banks

The banks will allow investors to access a portion of this equity because their risk is more than covered by the intrinsic value of the property. The banks know that if the investor has difficulty paying the monthly loan repayments the property can be sold for the current market value of 2,215,000. Remember the liability to the bank is only 1,218,000 so the bank’s risk is more than covered. Banks are eager to assist you to refinance because they make their money off the interest charged and when you refinance it. As our tenants are covering this additional expense with their rental income, refinancing means we can purchase more property!

So what portion of the equity will banks allow investors to access? Most lenders will apply a loan to value ratio of 80% of the current market value. This means that they are willing to increase the loan until up to 80% of the value of the property. To calculate the available equity we first apply the 80% LVR to the current market value and then subtract the debt owed to the bank. (2,215,000 x 80%) – 1,218,000 = 550,000. The equity available for the investor to use would be 550,000.  

The equity in your property can be used to play the role of a bank financing other investments. To transfer the equity out of the property and into your own bank account for reinvestment is a relatively quick and simple process. All you need to do is contact the bank that issued your bond and request the increase on your initial bond amount. The bank will then send a valuer to your property to confirm that it is happy with the increase in equity in the property. If the bank is happy they will advance the money into your bank account within days. 

In for the long term

Consider recycling the money in our example into other similar property investments over and over. After 4 years the investor buys a 2nd property. Another 4 years later in year 8 a further 2 properties are purchased (using the equity available in both properties). In year 12 the investor is now buying an additional 4 properties and now owns 8 properties in total. The interesting fact here is that they did this with only a 20% deposit for the first property. No further money was added to the overall investment but the portfolio grew exponentially! Armed with this knowledge it may be possible to accumulate a very large property portfolio.  

A word of caution: Although the numbers used are realistic in today’s property market, the above scenario looks at the power of leverage and capital growth in isolation and under constant conditions to show what is possible. This is never the case in reality. There are a number of factors to consider such as changing interest rates, cash flow and changing market conditions. In reality the actual situation will differ however it still illustrates an exciting possibility for young investors to generate wealth – especially if they start early. 

Wrapping it up

In summary, equity is the difference between the current market value of the property and the current debt. Through refinancing investors are able to access the resultant equity for the purchase of new properties. Understanding the power of equity and property leveraging will greatly increase your property investing aptitude. Need all the tools? We have them! Property Investing and Financing box deal.