Building a portfolio with equity

Back in 2012 I met a fabulous young buyer who was keen to build her financial future early. She was unusually pragmatic about the process and we quickly determined that ‘rent-vesting’ could work perfectly for her (buying an investment property in an area that would exhibit the strongest capital growth possible, while the landlord lives where they want to live in a rental property).

My challenge was the budget. I had $280,000 to work with.

We discussed risk profile, target tenants, gentrifying areas and her appetite for maintenance issues. In 2012 it was tough to find any houses on full blocks in the 15km radius but our goal was firm. If we could find it, we’d secure it.

In late 2012 we identified a property in Laming Rd Deer Park and moved swiftly to negotiate the purchase. 2012 was a tougher market in Melbourne but the signs of improving market conditions became evident towards the later months of the year.

This unrenovated 1960’s built weatherboard property on 628sqm of land was secured for $276,400 and a leaseback arrangement was facilitated for the vendors who were building their next home in the outer west. Despite the maintenance call outs and the cash injection some three years later for a kitchen and bathroom upgrade, this property can only be described as a star performer.

The bank valuation exactly five years later came in at $550,000. The value doubled.

By this stage the rental income more than covered the costs of holding the property and our client returned to us with an interest in building her property portfolio. With study and travel on her agenda, the main criteria she nominated was for us to help her identify an area that would enable her to continue investing without the need to cover ‘out of pocket’ costs. In other words, she needed the property to be cashflow neutral.

The planning phase was underway and her finance broker leapt into action coordinating her equity release from the Deer Park property.

Her first investment property had exhibited enough growth for her to be able to increase the debt against it to create a second loan account with the 20% deposit, stamp duty and buffer funds for the purchase of investment property #2. 

He then coordinated a pre-approval up to $400,000 for a suitable purchase.

In order to achieve a cashflow neutral outcome for our buyer, we knew we had to target a regional centre exhibiting gross rental returns above 5%. The rental income had to cover the mortgage repayments, council and water rates, insurances, property management fees and any maintenance costs. This time, targeting a relatively young, well-maintained property was paramount because our investor’s ongoing contributions had to be managed carefully.

We identified this gorgeous five year old reproduction period style cottage on a low maintenance allotment in one of Ballarat’s oldest established areas; Ballarat East. Boasting quality fixtures and fittings, a private courtyard and a glorious light-filled living area, this three bedroom, two bathroom house with garage was an ideal match for our brief. Likely to appeal to a professional couple or medico house-sharers, this quiet street on the Melbourne side of the regional city offers luxury living for a tenant. The cashflows were calculated, and combined with the already-existing positive cashflow arrangement for the Deer Park property our young investor’s portfolio will allow her to roll out her study and travel plans while managing her growing property portfolio.

As she directs her income into her offset account and rents continue to increase over the years, our investor can anticipate her debt will eventually be paid down in full. The combination of growth for her Melbourne metro asset and yield for her regional asset equates to a gentle, balanced portfolio. In today’s dollars her two properties will deliver her a gross rental income of over $650 per week…. not a bad start for a young investor. And that’s before she considers a potential subdivision project for Deer Park one day.

Wishing her a low-maintenance, happy and successful landlord experience with her newest purchase!