Buying one investment property is relatively easy. Building a portfolio can be harder. Going from one to more means investors sometimes reach ceilings as they go that are hard to punch through.
Leverage. If you want to build a portfolio in the NZ property market you need to know about leverage. That’s borrowing against it to buy more. Once you’ve got your own home or your first rental property and you’ve build some equity you can leverage it. When the property rises in value you can use that rise as the deposit for your next property.
Increase the value of your existing properties. In the past a 10 per cent deposit borrowed against your home or other investment properties was enough to buy more. Investors now need to put down at least 35 per cent on investment properties thanks to Reserve Bank of New Zealand’s loan to value ratio (LVR) lending restrictions, says Andrew King New Zealand Property Investors Federation executive officer. In order to increase the equity you can add value to the home, have it revalued and then extract the equity to buy a new property. Common ways to add value include crating more bedrooms, subdividing a large section or adding a minor dwelling.
Increase your income. When banks lend on investment properties they won’t take into account all of the rent from a property. One way to increase income is for partners to go back to work. Banks like that.
Start your property search
Create a positive cash flow. Having positive cash flow where the rent form your property is greater than all the costs such as rates, insurance, repairs and maintenance. This makes it easier to borrow on that next property. “During the 90s (for example) cash flow, or lack of it, was the limiting factor for buying more rentals,” says King. “Most people had equity, but low rental yields and lack of cash-flow were the most common brake on buying further rentals.”
Sell unproductive properties. If you’ve bought a property that doesn't fit with your long term goals it may be holding you back from being able to buy more. If you can’t upgrade the property in question to provide the equity or cash flow requirements to enable you to buy the further properties, it may be time to sell that property and put that money towards a better investment. Being able to cut your losses and run is a good trait in property investment that will pay off.
Outsource the work. Time holds many investors back. If you work full time you may not have the time or energy to manage the tenants and that stops you buying more properties. If that’s the case property management may be the answer. Expect to pay around 8 per cent of your rent to hand the day-to-day running to a property manager.
The key point to making a success of this, says King, is still to have a plan of how many rental properties you need to reach your long term goals, then a strategy for how you will be able to finance this number of properties. Use a property investment calculator.