The Biggest Secret In Residential Property Investment Revealed! PODCAST EPISODE 2

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Transcript

This is Ajay Valanju from Location Property Group. Thanks for tuning in to the Location Property Group podcast. Today we’re going to reveal the biggest secret in residential property investment.

Why Is This Secret so Important to Us?

Why do we need to pay attention to this? By implementing the knowledge from the secret that is revealed today, will be able to substantially increase the size of our property portfolio so we can achieve the ideal lifestyle.

This secret is something I wish I knew when I had started investing. Because if I did the property portfolio that I have today would have been double the size of what it is.

What do I mean when we talk about the biggest secret? If we have the option of buying shares, commercial property or residential property without any leverage it would be highly likely that the shares would outperform the commercial property, which would outperform the residential property.

However, once we bring leverage into the equation the game changes. The share market is valued by the second every single day the market is open for trade and the final price of market close becomes the accepted value of that share. So if we were leveraging against our share portfolio and if there was a drop in the value of those shares, if we were using those shares as security, the bank would come back to us with a margin call to pay down our loan if the value of the shares wasn’t high enough to justify the loan we have.

In the same way with commercial property, commercial property loans are written such that the property has to be revalued every 3-5 years. So again at that 3 or 5 year anniversary if the property market is not strong and the property revalues in at a significantly lower value than the last one, then we’ll be in a position where were either forced to pay down the loan, so that we’re in the normal 70-80% leverage against the new valuation, or were forced to sell the asset.

This is in stark contrast to residential property. In residential property loans and mortgages, the term of the loan is 25-30 years. And, over that 25-30 year period, we usually will repay the entire loan. The good news is that the underlying asset does not require to be revalued. As long as we pay our repayments on time then the bank has no need to come and revalue the property.

Why is this so significant? The significance of this is that we have very predictable cash flows. Which then gives us the extra confidence to grow our property to a much larger size than we would otherwise be able to do.

So How Do We Actually Implement This Big Secret? What Are the Steps Required?

So, step 1, when we see growth in our existing property portfolio, we revalue the properties that we feel have increased in value and increase the borrowing on those properties to 80% of the new value. What this does is it will release equity from those properties which we can use.
And we use that equity to purchase further investment properties.

And when we purchase those further investment properties 80% of the purchase price of those properties will come from the bank and the other 20% will come from the equity that we released.

Step 3 is we rinse and repeat.

So what are the challenges that people face when implementing this strategy and how do they overcome them?

Well as a property investor myself I’ve assisted a lot of other people to build substantial portfolios overtime.

The 3 greatest challenges that I’ve seen them face are:

The perception of debt by society. Debt is always seen to be like a dark ugly black cloud over people. The reason for that is that is its normally used for consumption to buy things like holidays, cars, for buying things that are either are consumed straight away or reduce in value over time without providing any other benefits.

Whereas we need to look at what the debt is being used for and that being the determination of whether it’s for a good thing or a bad thing rather than the debt itself being a bad thing. As long as we’re looking at what we are using the debt for if it’s for a good reason then debt is a good debt. However if we use it for consumption for buying things that decrease in value then that is a bad debt.

The second challenge with this strategy is overcoming the temptation to use this additional equity for consumption. So when we revalue a property and release sometimes hundreds of thousands of dollars of additional borrowing power. It takes real discipline to use that purely for buying additional investment properties, as a sports car or a fantastic, oversees, trip is also on the table. So in order to overcome this, it’s important to have it in our minds where we want to be going. If you can connect this release of equity and the purchase of the additional investment properties to you achieving your long term goal, that will assist you to stay on track and be disciplined with that equity release.

Location Property Group have 3 key rules of what debt can be used for:

• The first rule is that debt can only be used to purchase assets that increase in value over time.
• The second rule is that the asset that is purchased must have an attached income to it. The third rule is that the asset can also be leveraged against. Which allows us to build a larger portfolio.
• The third challenge that people face when implementing this strategy is as you grow your property portfolio and take on more debt, some banks will only lend to a certain level. Other banks will have restrictions when lending for particular geographic areas.
  So, what’s really important is that we are relentless when going about getting finance for our properties. We can’t limit ourselves to seeing just one bank or the bank manager I have known for many years. We need to really expand the scope in the same way that we are expanding our property portfolio.

To recap the key concepts, once again: by implementing this secret you can substantially increase the size of your property portfolio and achieve the ideal lifestyle.

So the first action step that we need to implement the secret is firstly ask your agent for a market appraisal on each of the properties that you have.

The ones where you see significant growth on, we need to go and get a bank valuation done on them. Once we receive the bank valuation we apply to the bank to have 80% of that value in loans and will basically release the additional equity. With that additional equity, we will use that as the 20% deposit on additional new investment properties. And in this way, we are able to grow a property portfolio very quickly and also have predictability over the cash flows. And so you have peace of mind and go to sleep at night.