Once you have your Investment Property Management Account, it’s time to plan how to best use it to start building your property portfolio.
Looking at the same example from Using Home Equity to Start Your Path to a Comfortable Retirement, Mr & Mrs Smith now have $400K in their management account. They can use this to buy an investment property, right? Well, not quite…
Before looking at properties, it’s a good idea to put together a budget for the management account so you can create a conservative property plan and minimise any risk.
Budgeting your account
In general, 10% of the amount in the account should be kept there for liquidity costs (things like maintenance expenses, periods of vacancies, etc.)
The next number to consider is the upfront costs of purchasing a property. This can vary depending on the pricing and areas you’re looking at, but a good rule of thumb is to allow $80K to $100K per property (for the deposit, stamp duty and settlement costs, for example).
In Mr & Mrs Smith’s example, they will have $40K (10%) set aside for liquidity, leaving $360K to invest in property. At an $80K average upfront cost per property, they can invest in three properties ($320K) today and have an extra $40K in reserve to contribute to their liquidity allowance and also save for investing at a later date.
How to pay off your home using your investment property
A commonly misunderstood concept is how you can pay off your principal place of residence with your investment property.
By purchasing an investment property, you will benefit from capital growth over time. The dollar value of the capital growth is usually greater than the amount of principal and interest being paid off on your actual home.
If you hold your investment property for long enough – typically a number of years – you can build up enough equity in your home to a point where you can sell your investment property, pay capital gains tax and other selling costs, and use the funds to completely pay off your mortgage.
We call the time when an owner can do this the ‘pay off period’ – sometimes this can be done in 10 years or less!
The savings on interest for the remainder of your mortgage can then be contributed to your retirement fund. Or, as astute investors realise the power of equity release, you can instead use your equity to go on and build a multi-property portfolio.
My management account is organised – what next?
Once your finances are sorted, you’re ready to start looking for your ideal investment property. I can help here too! Have a look at whether to buy new or established, or explore the various residential property types .
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SUMMARY
Once you have your Investment Property Management Account, it’s time to plan how to best use it to start building your property portfolio. By putting together a budget, you can create a conservative property plan and minimise any risk.
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