If you haven’t read part 1 of this series, click here
The theme of this series is showing how investors can adapt to/arm themselves against the new property environment of low market growth: we are now entering, not just a phase, but an era of low market growth, and investors who completely rely on market growth to give them the equity they need to expand their property portfolio, are in for a very disappointing period ahead. Single digit growth is the most anyone is predicting, for several years ahead.
Last time we saw that successful investors have a way to control the equity creation phase in their portfolio growth. These investors are the ones who get the best results… in both good and bad times. It’s a strategy that gives them an edge, frees them from being just a hopeful slave to the market, and makes a difference worth millions of dollars.
Controlling the equity creation phase allowed me to build a portfolio worth $3.98 million in less than 5 years. This would never be possible if I was 100% reliant on market growth for all of my equity.
That leads us onto today’s question…
What is the best way to create your own equity and get through step 3 in the shortest time possible?
For me personally, the biggest influencing factors in deciding on the most efficient way forward was my limited time and the limited money I had available. I needed an approach that didn’t require a lot of hands on work or time from me, and it didn’t require me to be constantly dipping into my pocket for more and more money. I wanted to be able to borrow as much as possible to grow my portfolio.
This is now the foundation of the investment approach we use in my business to grow portfolios for clients. You can see some of the success we’ve been having at AutomaticEquity.com.au
The first decision you need to make is whether you want to work with existing property or go with custom builds. There are positive and negatives for each one.
Existing Property: this is doing things like renovations and subdivisions. Personally, these did not fit my limitations. Renovations require a significant time investment even if you use tradies to do all the work. In addition to the never-ending stream of decisions to make and quotes to get, you also have to make sure you find just the right property. You need a property where you can see around $5 in valuation increase for every $1 spent, finding just the right one takes up a lot of time.
Sites for a profitable subdivisions are even more difficult to find but the time required to get planning approval is much more demanding than a renovation. Yes the profits are greater but I just didn’t want to invest that much time when there were easier options available to me.
The other limitation of working with existing property that didn’t suit my investment agenda was that once you have the finance in place for the property, you then need to keep dipping into your own money to pay for the renovations. This often requires having the equivalent of another deposit in reserve, and I didn’t want to tie up that much cash in the one investment.
There were two other factors that tipped the scale away from working with existing property for me. Firstly it was impossible to get any kind of written valuation for the end result of the renovation. Personally, I prefer knowing exactly what result I’m going to get before I sign the paperwork, renovations required guesswork. I want both the end result and every single cost locked in before I commit to a deal and that just can’t happen with a renovation or subdivision.
The final thing I didn’t like was the limited tax deductions you can claim on existing property. The federal government is encouraging investors towards creating new properties, and they are incentivising people like first home owners and investors to go that direction. They now limit the deductions you can claim on and existing property to encourage us into doing new builds.
Because I decided to go with new properties, last year my portfolio gave me $142,299 worth of tax deductions. If you’re in the 37% tax bracket that’s $52,650 in your pocket, $1,000 a week.
I intended to hold these properties long term so I wanted to get every advantage I could from them. Tax savings should never be the only reason for an investment decision, but as I said before, they certainly helped tip the scale.
I’m well over my word count, next time we’ll cover how custom builds are the perfect option for people who don’t want to surrender their limited free time to build a property portfolio.
for part 3 of this series.