How to structure your finances and build a multi-property portfolio

The motivation for doing so can be varied. Usually, investors are looking at supplementing their retirement, and some are looking at replacing their income with passive cash flow. Whatever your motivation, having a clear plan can mean the difference between an efficient and enjoyable journey and a costly nightmare.

Buying one or even two properties is manageable without too much planning, but even then, good management can optimise tax and cash flow in reaching your goal.

When planning to build a portfolio of properties, the very first step is to work out the size you want to grow it to. You can work out how much passive income you want at the end of your journey and work backwards to establish the size of the portfolio you need. For example, if your retirement target is to have an income stream of $100,000 per annum, you will need $2 million in assets, generating  five per cent per annum. You will also need to adjust this to ‘future dollars’, as $100,000 today will be worth a lot less when you retire. 

The limitation to your grand plan is going to be serviceability (borrowing capacity) and how much deposit you have to buy properties. There is no point planning a portfolio of 20 properties if your borrowing capacity is only$300,000. 

The next step is to enlist the help of a really good finance broker, who specialises in structuring loans for multiple property investors. This broker needs to understand how taxation works, what structures the Australian Taxation Office (ATO) will allow, and how to optimise an investment property’s cash flow and reduce your home loan mortgage at the same time.

As an example, I commonly come across couples with good incomes, who own a home with a partially paid mortgage and are gearing up to invest in property by building up their savings. They believe they have saved enough for a deposit and are now seeking an investment property.

In this situation, it is actually more efficient to keep the cash savings in an offset account against the home loan, which is not tax deductible, and release equity from the home to invest in property, which is tax deductible. With this structure, we have created a buffer by reserving their savings, and we have optimised the tax effectiveness of their investment.

Every structure will be different as every investor has a different profile. 

The way you release the equity is also very important. If you go to a bank, they will almost certainly advise you to cross-collateralise the home with the first investment property and any subsequent ones. This is very inefficient and will certainly create problems down the track.

Using an expert finance broker is the way to go, as bank lending officers usually do not have the skills to help with this type of structure. 

There are many techniques we can use to release equity and make it easier for an investor to add properties to an existing portfolio whilst keeping maximum flexibility and optimising cash  flow and deductions. The choice of how we release equity is largely dictated by the investor’s financial profile.

Getting the planning and structure right is the key to a successful and pleasant experience. It’s better to spend a bit more time getting the structure right than rushing straight into an opportunity – but don’t procrastinate!

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