How to Build your Property Portfolio Quickly | Leap-Frogging
How Leap Frogging helped me build my own portfolio & how you can benefit from this strategy
Leap-frogging has helped me build my portfolio to over 30 investment properties by just age 29. This strategy involves using equity from one property to purchase more properties, and it is often used to help build up property portfolios as quickly and as risk-free as possible.
If you are reading this and you want to get into property investing or build your own property portfolio to build a passive income and reach your financial goals, then this is a strategy that I would use in your position.
There's a lot of different ways you can implement leap-frogging. Personally, I've used this strategy a few times, however I have also saved up a lot of genuine deposits by working multiple jobs simultaneously and building my own business.
According to the ATO, 72.8% of individuals that own an investment property own just one, 18.9% own two, and just 0.9% of individuals own six or more.
There are a lot of variables when it comes to purchasing property, but I like to stick with the basics. In my property portfolio, I have stuck to properties that have a purchase price of around $200,000 - $300,000, and even some around $100,000.
Clients always ask me how I have started from scratch and how I have grown my portfolio so quickly? The key is to buy properties that are below comparable sales. This includes buying properties that are bank repossessions, off-market, price reductions, and divorce sales. I always want every property I buy to be a bargain! It must be below what the actual value is. A lot of clients think that this is ridiculously hard to do or that it's impossible, but it's actually very achievable and I do it all the time.
The properties that I pick up for myself and clients are below comparable sales in the market. For example, If I picked up a property for $200,000, similar ones would be selling around the area of similar quality for $230,000 – $250,000. This means that you would be making $30,000 to $50,000 right away purchasing a property like this.
“Having the luxury of a property portfolio that was profitable and self-sustaining meant I didn’t have to worry about taking six weeks off work. They were taking care of themselves and producing an income while I travelled every day and had the time of my life.” - Eddie Dilleen 10 Properties by 25
Leap-Frogging: How it works
For example, say you are starting with $30,000 in savings as a starting point and you have a borrowing capacity of around $400,000 - $500,000. For this scenario, we pick up a property for $200,000 that we have done prior research on. If you have $30,000 savings and you did a 10% deposit, the loan on that property would be $180,000. This means you would use $20,000 out of your $30,000 savings to purchase the property, and then you would need to spend another $10,000 in stamp duty, legal fees, pest and building inspection, and other expenses.
Let's say the property rents out for $300 a week. If you fast forward to around 3 - 6 months down the track you can get the property revalued for around $240,000, which makes sense based on comparable sales. However, you would not use that equity to borrow a full amount to purchase the next property.
First, you have got to release the equity, so that the equity is free in your account. Technically it would now be classified as cash in your account. To do this, you must do what is called a loan top-up. Since you borrowed this property at 90% of $200,000, you get a new 90% loan of the new value at $240,000. This now makes your new loan $216,000. To work out how much money you are going to receive out of this, you must minus your old loan from your new loan. In this scenario, this means that you are getting $36,000 out, and this amount can be released back into your account.
It is important to note that if you do that at a 90% lender clause, you're going to have to pay lenders mortgage insurance (LMI). You might pay around $3000 - $4000 LMI based on the $200,000 price of the property. This means you now have $32,000 back into your account rather than the original amount of $36,000.
Essentially, you have got your deposit back!
You started with $30,000
Bought a property for $200,000
Got it revalued at $240,000
Got a 90% loan top up
The old loan was $180,000, and now the new loan is $216,000.
Keep in mind that you are still receiving $300 rent to pay off the mortgage and other associated expenses, and you now have $32,000 in your offset account so that you are not paying the interest on it.
Currently you have $32,000 back in your account which means you can now go and buy another property for $200,000. You can keep doing this again, and again, and again. That’s if you do it the right way.
Doing it the right way depends on which bank you go with, what size deposit you use, and how you get it revalued as well. This whole process can take 3 - 6 months, and sometimes even 8 - 12 months.
What to be Wary of: Cross-Collateralising
Leap-frogging is a great strategy to quickly build your property portfolio, however keep in mind that you are not cross-collateralising properties together as this can get you stuck. It is something you should be very wary of as it can limit your choices in the future if you want to sell, refinance or access equity.
A common thing that happens if you purchased your first property for $200,000, get a loan for $180 000, and then get it revalued at $240 000, is that the banks will technically say that you have got $60,000 between your loan and the value worth of equity. What a lot of banks say is, “no worries go and purchase your second property”.
If the second property you purchase is $200,000, they will use the equity which is $60,000 in your first property to keep your loan at $180,000, then they will cross-collateralise your property and say that you can borrow 100% of that property value and then you will borrow the full amount of $200,000. What this does is cross your loans together. I DO NOT RECOMMEND DOING THIS.
The downside to cross-collateralising your properties (crossing your loans together) is that when you want to sell off your first property to make some money, the banks will then take a portion of that money you made from selling the first property to put against the second property as the Loan is at 100%. This is because you must abide by the LVR restrictions that the lender you go with has in place.
Disclaimer: This is not intended as legal, financial, or investment advice and should not be construed or relied on as such. Before making any commitment of a legal or financial nature, you should seek advice from a qualified and registered legal practitioner or financial or investment adviser.
Get my FREE E-Book!
‘10 Properties by 25’ is your ULTIMATE property investment guide!
