Expanding a property portfolio is no easy task. Picking the right properties is hard enough, but it can also be difficult to secure finance for additional purchases. Even if you do manage to secure finance to buy more properties, using this finance in a way that maximises portfolio growth can be a challenge – especially if you're looking to accelerate growth quickly. Chief Executive Officer of Century 21 Home Loans, James Green, recently wrote an article for Century 21's Property Investor about how investors can use finance to grow a portfolio faster.
How to use finance to grow your portfolio faster
There is little contention that now is a relatively affordable time to secure housing finance. Interest rates are currently at 53-year lows, well below their historical long-term averages, and there are variable and fixed rate packages on the market with interest rates of 4.99 per cent and 4.95 per cent, respectively.
Fixed rates, in particular, are proving to be very popular, with almost 30 per cent of the home loan market comprising fixed rate lending in May - the second highest level of monthly fixed-rate lending on record (behind April 2013).
There has been a substantial spike in loan applications and approvals, with Century 21 Home Loans recording a 41 per cent increase in sales in May 2013 over May 2012. Recent data from the Australian Bureau of Statistics also shows that the value of investment home loans rose by a seasonally adjusted 1.1 per cent to $81.4 billion in April 2013 and internal figures from Century 21 Home Loans show that investment lending made up 37 per cent of mortgage applications in May.
The increase in investment activity is not surprising when one considers the lending environment at present; lowered interest rates have boosted opportunities for positively geared property investments and it is now cheaper to buy than rent in many suburbs across Australia.
In light of these developments, some investors may see an opportunity to grow their property portfolio faster. To make this prospect feasible, however, investors will need to have a smart and well-considered finance strategy.
So how can you ensure that your finance strategy is conducive to accelerated portfolio growth as well as aligned with your investment appetite and personal circumstances? Here are a few key tips.
REFINANCE YOUR CURRENT LOAN FACILITIES
There are three key reasons why you should consider refinancing your loan facilities. Firstly, doing so will likely enable you to secure better loan deals across your existing portfolio - reducing your overall payments and providing extra capital for new investments.
Secondly, refinancing may allow you to borrow against the equity in your existing property (or properties) to finance additional acquisitions.
Finally, and perhaps most importantly, refinancing will necessitate a valuation of your investment portfolio, which will help you to identify what assets are and aren't performing, and to take action accordingly.
REVIEW YOUR INVESTMENT PORTFOLIO AT LEAST ONCE EVERY THREE YEARS
Too many investors try to grow their property portfolio without clear and measurable goals, often leading to underperformance of assets and wasted time and money. It is for this reason that I recommend working with a mortgage broker and financial planner before making new investments; doing this will allow you to map out goals, timelines and strategies for not only prospective investments, but investments already in your portfolio.
Setting goals and timelines will provide you with a tangible reference point to measure the performance of your investments over time. With these measures in place, you'll be better positioned to determine the returns on your investments and which assets are worth holding on to or letting go.
While setting investment goals and regularly reviewing performance may seem like relatively obvious steps, they are fundamental for investors looking to grow a property portfolio quickly.
Because property is generally an asset that people hold on to for long time-periods, there is a tendency for property investors to take a back seat in terms of reviewing asset performance. If you're looking for long-term gains, regular performance reviews are arguably not as important; but if you're aiming to leverage your investments to grow your portfolio quickly, your capital should be invested in assets that are generating returns and increasing your borrowing power in the medium-term.
In my experience, investments that break even or depreciate over the medium-term generally continue to perform poorly over the long-term. In these instances, investors would be wise to seriously question whether the asset is worth holding on to - particularly if they're looking to accelerate portfolio growth.
Regular reviews of your investment portfolio will also help you to ascertain whether or not your asset weighting is consistent with your financial appetite. Your financial goals and risk profile may change over time and, as such, you might find yourself wanting to move between different asset classes and diversification strategies. Often these decisions will come down to your perception of market conditions and experiences with different asset types.
By reviewing your risk profile and financial appetite with a financial planner, you may be able to recalibrate your investment portfolio to have a sharper growth trajectory. There is no set period for reviewing your portfolio - however, prudent investors will conduct a review at least once every three years, if not more.
WORK WITH A MORTAGE BROKER AND A PROPERTY-CENTRIC FINANCIAL PLANNER
It is always wise to work with a mortgage broker and financial planner in combination to ensure that your borrowing strategy and financial plan are properly aligned and conducive to growth. But how can you identify the right mortgage broker and financial planner for your investments?
In terms of identifying a mortgage broker, I would recommend working with someone who has at least five years' mortgage broking experience and a comprehensive understanding of the property market. To this end, it is often best to use a broker who is aligned to a property group - for instance, Century 21 Home Loans. Mortgage brokers aligned with real estate groups tend to have the strongest property market knowledge and are specialised in helping people to buy properties, as opposed to refinancing and securing other loan products.
Mortgage brokers affiliated with property groups are also often able to call on favours from their real estate networks. For example, if you are a Sydney-based investor with an interest in buying in Melbourne and New York, a Century 21 Home Loans broker would be able to put you in touch with brokers and real estate agents in both cities for no cost. Through the broker's network, you might also receive a variety of free services such as Comparative Market Analyses (CMAs), valuations and market advice.
Once you've spoken to a mortgage broker to ascertain whether or not you're able to make an investment, it is wise to get the broker to refer you on to a property-centric financial planner. Why is this? Because many financial planners advise predominantly on equities and cash-style investments and, as such, often don't have particularly strong knowledge in the real estate space.
The risk you face in approaching a non-property-centric financial planner is that they may steer you away from property investing, even if this asset class could deliver you the best results. This is why a mortgage broker can be such a valuable reference point; they will have tried and proven relationships with property-centric financial planners.
By getting a direct referral from the broker, you may end up saving yourself a considerable amount of time and money; you'll be more likely to identify a suitable financial planner at the start of the process, rather than going in blind and potentially having to pay another financial planner later down the track.
For more information on property finance options, contact a Century 21 Home Loans broker today.