It’s the percentage of properties you own
Many Aussies believe that owning multiple properties means you’re cashed-up and rich.
But it’s not the number of properties that makes you rich; it’s the percentage you own.
For example, imagine two investors. One owns 20 properties, the other owns three. Who’s better off? To decide, we need more information.
The investor with 20 properties owns around 10% of each house, which they bought for an average of $350,000 each. The investor who owns three properties, with the same average value, owns all of them outright. Meaning they don’t own any more money to the bank.
Now, of course, it’s easy to decide which investor is better off. The investor with 20 properties actually only owns $900,000 worth of value. The investor who owns three properties outright has a net worth of $1.35 million.
Nonetheless, I’m sure Kevin Young, the founder and director of the Property Club, who reportedly owns close to 200 properties, feels pretty rich.
How did he amass such a portfolio?
Paying interest only can get you quite far. Of course, you have to have enough cash for more than 200 deposits. But after purchase it’s as easy as renting it out and letting tenants pay the monthly interest bill.
Paying principal and interest
This strategy doesn’t work so well if banks force you to start paying principal and interest. And that’s exactly what happened to Kevin, according to The Australian Financial Review:
‘Mr Young, who claims to own a portfolio of nearly 200 properties making him the country’s “largest individual residential property owner”, said he had been forced to sell some of his own properties due to the lending changes.
‘Interest-only loans typically cover a fixed period (up to five-years) and are charged at a higher interest rate, before reverting to principal-and-interest repayments for the remaining period.
‘According to calculations made on the Australian Securities and Investments Commission’s Money Smart consumer website, a borrower taking out a $450,000 interest-only loan at a rate of 4.5 per cent over a three-year period would see their repayments rise over $1000 a month — or 59 per cent — once the loan shifted from interest-only to principal-and-interest.’
Property prices aren’t growing
It also doesn’t help that property prices aren’t growing like they used to. Price growth in Sydney has slowed. And Melbourne isn’t tipped to post stellar growth this year either.
This capital appreciation is what many property investors count on to make their investments worth it. With rising property prices, they can create value in their investment by simply waiting.
The Australian Financial Review continues:
‘Alongside Mr Young and his Property Club members, other prominent investors are also running into trouble due to the banks tightening up their investor lending policies. The Financial Review revealed last week that Sydney investor Nathan Birch was sued by his lender last year after his company defaulted on a mortgage over a Gold Coast investment property.
‘“APRA has done a lot of damage trying to fix a problem that did not exist,” Mr Young said. He said the changes effectively meant that a typical investor could not own more than two properties and predicted more retirees would have to sell their investments and rely on the age pension.’
Junior Analyst, Markets & Money
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