Finance is the most important part of property investing.
There’s no point finding that perfect property if you cannot afford to buy it.
The reason I love property so much is because you can finance it, meaning your profits are greatly leveraged. I prefer an infinite cash on cash return for my profits which means that each investment property is 100% financed. Most people have heard the term recycling your deposit, but how do you actually do that?
Renovations and developments: To on sell.
When you are purchasing the property, get it valued and talk to the valuer about what you are planning to do to it. If you can show them pictures of previous projects you have done. This will allow the valuer to give you a projected valuation on the finished building.
What this allows you to do is to get your finance to buy the property, but the bank will note down what you plan to do with it. Once you have completed your renovations/development you can get your valuer to tick off that the property now meets the projected valuation. With that the bank will refinance you up to a specified loan to value ratio (LVR). This means you can get your deposit and reno costs released to you and own the property with no money in the deal, simply by using your manufactured equity. You can now go do another deal while your property sits on the market to sell. Once it settles you will get your profit.
Buy and hold:
How do you own a house with no money in the deal?
In a nut shell, by adding value and then refinancing to release your deposit. As with renovations you need to add enough value to the property in order to increase the value of the property. As you are holding on to it, the best idea is to do something that will also increase the rent: adding another bedroom, building a sleep out/minor dwelling, renovating to a certain market that will pay more.
Once again when you have finished the value add you must get it revalued and go back to the bank to release your deposit. What you need to be careful about in this situation is making sure that you don’t make yourself negatively geared by increasing your loan costs. Do market research to ensure that the new rent will keep you neutrally geared at the very minimum.
The second way is to buy in a high growth area and wait 6 months for the market to push up the value of your property. In 6 months time you can get the property revalued and release some of your equity then. This would work for a passive investor who does not want to worry about renovations etc… And can afford to wait 6 months to get their deposit back. Once again you have to make sure that the rent will cover the increase in lending costs.
The third way is to use another property as security. This will allow you to purchase a new property 100% financed. This is not a strategy that should be taken lightly. If for any reason you forfeit on your payments, then the bank would have the right to sell your other property to cover its costs. However this strategy does work well if you were to use the property as security, buy the property, do some value adding work to it, refinance and ask them to drop your other property as security. This way you manufacture your own equity, and get the costs of the value add returned to you. This strategy would work for people who already own their own home or 1 investment property and are looking to build their portfolio. I would try to keep the family home out of your investing as much as possible.
By releasing your deposit and recycling it, you can purchase multiple properties through-out the year where most people would only be able to buy 1 or 2.