The key to portfolio growth in the coming low growth environment: Creating equity
Looking at the conditions, it’s obvious that 2018 is not going to be a year of massive property growth. Investors who are dependent on market growth for their equity creation are in for a very frustrating time over the next few years.
The steps we need to take to keep our portfolios growing in the low growth environment we’re entering are very clear and surprisingly straightforward to implement.
Waiting it out is a very bad idea. If you look at the key factors that have been driving the hot markets, they are simply not there anymore.
The factors that make another “Sydney style boom” impossible are tightening LVRs, reduced foreign investment, yield compression, already low rates, already low affordability and low wage growth. Yes, we will still see modest growth but changing just one or two of these factors will still not result in a property boom.
Lower and slower market cycles are going to be with us for the next five to potentially 10 or more years. Personally, I don’t want to wait that long.
Building a property portfolio is ultimately a very simple activity with straightforward steps:
- Get a deposit
- Invest in a property
- Create equity
- Refinance your deposit back out
- Repeat
Step three is our big leverage point, this is where we can take control of the speed in your property portfolio. In 2018 and beyond, if you are reliant on market growth to get through step three… it’s going to be a very disappointing time for you.
The obvious implication is that we need to take control of the equity creation phase at step three. This is not an untested or new tactic. In fact, as history has shown, it is the most successful property investment strategy to implement.
Tim Gurner didn’t turn $34,000 into $460 million in 15 years by waiting for market growth. Harry Triguboff didn’t create a $9-billion empire in less than 50 years by waiting for market growth. These men knew how to create their own equity at step three.
Anyone I know with a substantial portfolio has used some kind of rapid equity creation strategy to get there. I believe 2018 will be the beginning of a renaissance or rediscovery of equity creation and forced value strategies in the property investing community.
What’s the best way to create your own equity and get through step three quickly?
Firstly, you need to decide if you want to work with existing property or go with custom builds.
Existing: renovations and subdivisions – require hands-on involvement and time, are cash-intensive, and now there are reduced tax deductions.
Custom builds: custom builds, duplex and small developments – operate remotely so low time commitment, can be fully financed and have maximum tax deductions.
My personal preference is custom builds because of my busy schedule and I can get a far more predictable result. When I started building my portfolio, I knew I didn’t have time to do a renovation, but I did have time to sign some paperwork. That meant custom builds were perfect for me as a time-poor investor.
The predictability of the result comes from instant equity, or if you can’t afford a deal like a duplex, you can use mechanical momentum. We built a portfolio for a client worth $2.17 million in 21 months off the back of mechanical momentum, so it can be just as powerful as instant equity in getting through that equity creation phase at step three.
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