Growing Your Property Investment Portfolio
If you have one or two properties and want to expand your portfolio without putting more of your equity in, you have two main options. You can borrow money against the market value of your equity in the property investment and/or create a positive cash flow from your investments. You can also sell your existing properties as a way to cash out on increased valuation.
Leveraging your equity growth
If your property increased in value, the difference between your purchase price and current market value is technically the ‘equity’ that belongs to you. If you sell your property, you’ll get that equity in cash. You can also get a loan using that equity as your collateral. Lenders usually offer up to 80% of the equity value. You can use that loan towards another property. Debt acquisition should be done with caution as overextending can create a huge financial burden and impact your credit score. Moreover, since you’ll be paying interest, your cash outflow will increase as well.
Improving cash inflows from your properties
Another option is to improve the income you generate from the invested property. You most likely have a mortgage on a property with a monthly payment to the bank that issued your mortgage loan. If you are also the occupant of your property, then the net cash flow is negative as you’re paying the monthly payment without any income to offset it. If you are renting out the property (whether a spare room, only when you are on a holiday, or to a long-term tenant), you’d be able to generate enough monthly rent from the rentals to hopefully cover the cost and then some more.
Another way to improve your net cash flow is by refinancing your mortgage. You can work with your bank to lower interest rate or fees (or both). Even just a few basis points off your loan rate could make a significant difference. Your bank will only be willing to negotiate if you’ve been paying your mortgage on time for a few years. It also helps if the property has appreciated in value since the bank will run a loan-to value ratio analysis when evaluating your refinancing options.
Maximising your property income
Your property investing strategy will depend on your financial situation and goals. If you are renting out your property and have to purchase another home for yourself, your mortgage payments will double which will then offset partially by the rental income. There’s no right or wrong answer but you can do some research to assess the revenue potential of each option.
First, you have to assess the value of your property and the trends in your area. If the property is greatly appreciating in value where the profit from selling it could give you a significant cash payout, then it may make more sense to sell the property and use the gains towards purchasing additional homes. If you feel that the property value may continue to increase, you might want to rent out the home since rental value normally increases when the property value does. You could also influence the value increase through renovations and adding amenities.
If you decide to rent it out, you have to decide whether you want to do short-term vs. long-term rental (link to internal). You should check the applicable ST rental regulations in your state (link to internal) before making your decision as your property may be subject to restrictions. Provided both rental options are available to you, here are the possible ways you can maximise your cash inflows:
- Live in the house and rent out a spare room to either guests or tenants to further offset your mortgage payment until you sell
- Rent out the property on short-term accommodation booking sites such as Airbnb to make good money
- Find a cheap apt to lease for yourself and rent out your property to tenants or short-term guests
Regardless of whether or not you choose short-term or long-term rental, you may incur additional costs associated with operating rentals. Property management is a full-time job and thus may require hiring a dedicated property manager (link to internal), especially if you decide to go with short-term stays. The fees offered by property management service providers are often a shared revenue model so they’ll be incentivised to maximise occupancy rate through efficient calendar management, dynamic pricing, and other techniques. Short-term rental is often more profitable then long-term in daily fees but long-term rental guarantees occupancy and income level. However, there are certainly ways you can maximise your occupancy rate (link to internal) for your holiday/short-term accommodations.
As a property owner, you have obligations to your tenants/guests. Maintenance and amenities will be part of your service costs to continue generating rental income. Keep in mind that if your property is ‘positively’ geared, meaning that the net cash flow is positive, then you will also owe tax on the gains. For negatively geared properties, you will be able to leverage certain tax deductions.
You should look at the pricing of average long-term rental and short-term rental of similar properties in your neighbourhood and find a conservative estimate of revenue projection to find the best option. If your property is located in a popular area with all-year-around peak season, then it may be worthwhile to pursue the ST accommodation hosting route since successful hosts with professionally managed Airbnb properties earn up to $2 million in annual revenue. It could accelerate your investment growth and expansion plan.
