Whether you have yet to start on your property investment journey, or perhaps only have a single investment property under your belt, you may be asking yourself what is the best way to build a property portfolio.
Property investment is something that can bring significant returns over the long term, and ideally give you financial independence later in life and into retirement. One of the keys to successful investment is the length of time you hold properties, rather than simply when you acquire them, and so the sooner you can begin to build a property portfolio, the more likely you are to achieve your financial goals.
In short, it’s never too early to start developing a strategy to build a property portfolio.
How to build a property portfolioAnyone who has bought a house and then sold it for a profit will understand the potential for making significant returns from property — and this potential is increased when you own multiple investment properties.
Be as informed as possible
The first step to creating an investment property portfolio is to ensure you have as much information as possible. If you’re not up to speed it can be costly, so you need to get as much advice as you can, especially at the outset.
At High Income Property, we can advise you on every aspect of purchasing an investment property and growing your portfolio. This includes providing well researched and up-to-date information on the best places to buy, effective investment strategies moving forward, and advice on how to manage and maintain your portfolio.
Define your goals
Your financial goals will influence your strategy to build a property portfolio. You need to consider, for instance, when you want to retire and how much income you will need. It’s also important to factor in how much of your retirement income will be derived from your property portfolio.
At the same time, however, it’s important to understand that you do not need to have a large income to grow a property portfolio. Provided you have the ability to save some money, and/or access some additional funds, you can formulate an effective strategy that will enable you to invest successfully.
What property portfolio strategy is right for you?
Although your property portfolio strategy will be influenced by your personal circumstances, there are nevertheless sound principles that apply across the board.
- Choose properties in locations with high and/or growing demand, as this significantly impacts on your tenancy rates and income flows. This is especially important at the outset, when you most need positive cash flow to grow your property holdings.
- You also need to have a clear idea of your attitude to risk and debt. Debt can, paradoxically, be productive if structured in the right way, so it pays to seek professional advice as to how you can organise your finances to facilitate buying property.
- Successful investors understand that buying property requires a long-term approach, and that the longer you own a property, the greater the potential for capital growth. Rather than trying to second guess the market and waiting for the ‘optimum’ time to buy, you are always better off buying when you can. This applies both to your first investment property, and subsequent ones as well.
- Once you have acquired one or more properties, you can use the equity accrued as the basis for subsequent purchases. This means that once you start building a portfolio, you don’t need to use your own cash to buy further properties.
- Look at investing in a range of states, districts and suburbs, as well as different property types, rather than confining your investments to one location or style of property. Diversity in your strategy means you are less susceptible to a downturn in a particular place or sector affecting the overall value of your investments.
In addition, there are other decisions you need to take as part of a successful property investment strategy, depending on your personal circumstances, your income and savings, and your short- and long-term goals:
- Should you invest in residential or commercial property?
- New property, house-and-land package, a duplex investment property or buy to renovate?
- Are you looking for positive cash flow, capital growth, or a mixture of both?
- Can you take advantage of negative gearing?
- How long are you planning to hold your investment property?
What sort of home loan do you need?
An important element of your property portfolio strategy will be the sort of home loan(s) you take out, as this can significantly impact the ongoing affordability of your investment. There are a number of options open to you, and at High Income Property we can advise you on what sort of loan will work best for you, given your personal circumstances and goals.
- Do you have sufficient capital or equity for an investment home loan?
- Is an interest-only loan an option?
- Will a fixed rate or variable rate work be more cost effective?
- Do you qualify for a construction loan?
- Have you considered a Self-Managed Super Fund investment loan?
What are the keys to property portfolio management?
Once you have begun purchasing properties, you also need to consider how you manage your portfolio.
Are renovations worth it?
A question that often arises is the extent to which you renovate an investment property, and how much you spend on upgrades. Experienced investors generally agree that the value of a property increases when money is spent on renovating particular areas, such as the kitchen, bathroom, garden and front of the property.
However, at the same time, managing your portfolio efficiently means that you don’t overextend in undertaking renovations — your outlay has to be proportionate to the potential returns. A good rule of thumb is to not spend more than 10% of a property’s value on renovations, although this is not set in stone and will depend on circumstances.
Keeping an eye on your investment
You also need to keep an eye on your property, either yourself (which can be impractical and/or time consuming), or through the services of a property manager. This includes having a clear understanding at all times of your incomings and outgoings, as well as the physical condition of the property. As your portfolio grows, this can become challenging, but a good property manager can take much of the stress out of this process.
How do you structure your portfolio going forward?
In addition to these sorts of practical issues, as the number of properties you own increases, you might need to consider some broader portfolio management questions, such as:
- Are you better off holding your property portfolio investments in your own or a business name?
- Is a family or discretionary trust an option?
- Can you set up a SMSF for your investments?