Property investment is a steady game. Its low risk profile and ability to bring returns in the form of capital growth AND rental income is what makes it very attractive. But it is a slow game, too, because it takes time: your money gets tied up in bank loans, which limits the number of properties you can buy at one time and consequentially, your ability to double, triple or quadruple your returns. Or so we think. But there’s a way to multiply your properties and increase your returns faster without feeling over-leveraged to the gills. We explain how refinancing is an important strategy/ hack in helping you build wealth.
Refinancing is an effective strategy and an impactful way of growing your portfolio.
The first and most fundamental thing before you even think about optimising your investment is to ensure you have a Proven Property Game Plan. CSI PROP’s Proven Property Game Plan, which covers Criteria (7 S.A.F.E.T.Y 1ST Criteria ©), Strategy (7 G.O.L.D.M.I.N.E Strategies ©) and Impact, is instrumental in helping investors pick the right location and project to invest in. Purchasing your investment property with careful consideration reduces risks and ensures that you get better returns from the get-go, and steady capital growth and rental income over the years.
What is refinancing?
Refinancing, in the context of property, is remortgaging. A borrower seeking to refinance his property will take out a new loan to pay off the existing one. Essentially, he is replacing his debt/loan with the current lender, with one that has more favourable terms.
What are the benefits of refinancing?
The benefits of refinancing your mortgage include:
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- Getting a lower interest rate & reducing monthly repayment
- Locking in a fixed interest rate (for those with variables rates to avoid interest rate hikes)
- Accessing funds from built-up equity/ profits of your investment (which you can use to fund another property purchase)
Accessing funds from built-up equity (cash out) is an important financing hack to optimise your property portfolio. Imagine being able to increase your net worth and multiply your portfolio in half the time, while getting passive income!
How much cash you can take out depends on how much your home value has grown compared to how much you owe the bank.
Accessing Funds from Built-Up Equity
How to Refinance Your Investment Property To Buy More?
A common practice for most investors to grow their property portfolio is to pay down their mortgage as quickly as possible. Or, wait for years for a property to increase in value before disposing it in order to access the profits to purchase more properties. But by doing this, you lose a performing asset and end up paying capital gains tax over the profits of the sale!
A good alternative is to optimise after a few years, e.g 5 – 7 years. As the value of your property increases, you refinance the loan and take out the profits (from the increased property value) to fund the purchase of another property. As your properties increase in value over the years, your cash-out amount increases as well and is testimony to the growth of your own net worth.
Here’s a Simple Illustration:
Year 0: Buy Property A
Property Price: $1,000,000
Loan @ 70%: $700,000
Cash Investment: $300,000
Assume Price Growth 7% p.a.: $70,000
Price Growth 7% x 5 Years (35%): $350,000
Year 5: Refinance Property A and Buy Property B
New Property Price @ 35% growth: $1,350,000
Refinance @ 70%: $945,000
Pay Off Old Loan: $700,000
Cash in Hand: $245,000
Assumptions
- Property Value Grows by 7% per year
- Refinance every 5 years
- Cash/ Equity Drawn Out to buy new property
- Rental Yield continues to provide income
Refinancing: Should I Do It?
By refinancing, you get to keep your performing assets, and use the cash-out to invest in more properties while your existing properties continue bringing in the rent (and grow in capital!). CSI PROP’s Buy, Hold and Refinance Model is effective in building your property portfolio and increasing your passive income, especially in economically challenging times. Because even in times of crisis, everyone still needs a room over their heads.
It’s extremely important to ensure that you pick the right investment properties—going back to investment fundamentals and having a proven game plan will keep you afloat during the tough times. It’s also important to refinance with a good lender and get the best terms.
Join our upcoming webinar to learn more about global property trends and how to invest in property through both good and challenging times by clicking on the link here: https://bit.ly/3SEliTU
By Vivienne Pal
Disclaimer: CSI PROP is not a licensed financing, tax or legal advisor. Investors are advised to seek independent and qualified legal, financial and tax advisors.
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