This article isn’t only a discussion on how property owners can expand their investment portfolio without the need to save tens of thousands of dollars; it’s also an argument for not spending your savings on property investment if you don’t have to.
The difference between equity and physical currency is the availability of the resource. While money can be immediately used without issue, equity requires leverage. Therefore, if you can allocate your equity to the purchase of property, and maintain your savings levels for reactive spending purposes, you have a well-balanced strategy.
Consider this scenario; a property owner has an aim of building an investment portfolio of nine properties. The investor has $60,000 in savings and owns a single property which they also live in. That property has, thanks to a red-hot property market, $45,000 worth of equity. The investor looks at all the available resources and decides to purchase a single property by leveraging the equity in the property, and leaving the savings where they are.
With finance approved on this basis, the purchase is complete and the portfolio has risen by one. The investor is now in a position where they can allocate their liquid finances – savings – to other investments or solve unexpected problems as they arise if needs be.
Now, the property investor decides to increase the value of both of the properties they now own. Using $30,000 out of their savings, improvements are made to both houses that will have an immediate and direct impact on the value of the properties. These improvements have been researched to provide the best, “bang for buck,” regarding the value of the properties. Following this, the properties are revalued and the increase in equity can then be used to purchase another property.
And so the process continues, with the investor on a rapid pathway to financial freedom, and, importantly, a diverse enough portfolio to withstand market turbulence.
Most critically, the investor allocated all available resources effectively. Rather than simply responding to circumstances and taking the traditional route – spending available savings on a property deposit, they analysed, researched and took strategic action. Obviously, if all the savings had been spent on a deposit, there wouldn’t have been any liquid resources available for improvements, which would have slowed equity growth. The investor was aware that the equity is an earned resource, and if critical mass is going to be achieved, it should be leveraged.
Importantly, this article discusses financials only. In attempting to make a case for strategic investment, there has been no mention of the properties themselves. Leveraging finances is pointless if you are investing in the wrong property or an area that has poor growth. To build a robust portfolio that will continue to grow in value through numerous cycles, the focus must be placed on the properties themselves. By leveraging financials, and failing to invest as wisely as possible, many thousands of dollars can be lost, and investment journeys lengthened.
Take your time, look at your investable capital as a resource to be allocated, and strategically purchase the property that is most likely to help you achieve your investment goals.
Zaki Ameer | Founder | DDP Property