The fundamental goal of building a property portfolio is to generate passive income from multiple properties. But one of the biggest hurdles for investors is lacking knowledge on how to invest safely from the start and remain financially secure whilst maintaining their lifestyle.
Around 20% of Australian households hold an investment property, with 71% of the group owning only one investment property*. These stats indicate that many of the investors fail to grow their investment portfolios.
If investing in property was easy, everyone would be doing it, hence why it is crucial to rely on professionals to assist you on the journey.
Below we outline some key things to consider when building a property investment portfolio.
What do you want to achieve?
Before you start, you must be clear on where you want to end up. For example, the goal might be to retire early on the passive income derived from your portfolio. But be specific about the income you’re striving for - it could be a total figure per week, month or year. And in what period do you want to achieve this. Taking these steps will help guide your decisions as you start to build your portfolio.
Sort out your budget and finances
Sort out your budget and finances so you can afford to hold and grow the portfolio long term. Cash flow keeps you in the market, whilst capital gains will get you out of the market. The state of your finances will determine your borrowing capacity, ability to service loan repayments and how quickly you can grow your portfolio.
Prepare a budget so that you can create a consistent cash buffer and pay down debt. Your income level and cash buffer will also determine the investment strategy you go for and how much you can diversify your portfolio. Part of this process is to understand all the risks involved when investing in property, what your risk profile is and strategies to minimise that risk.
Before making any important financial decisions, we strongly advise you to consult a mortgage broker, financial advisor or accountant to confirm your ability to purchase and hold multiple investment properties.
Ideally, an investment property will generate income to help cover the holding costs whilst growing in value over time and building equity.
You can use equity instead of a cash deposit to buy your next investment property and build a portfolio in time as the equity compounds. By paying down debt as quickly as possible, you will multiply your wealth along with equity gains through capital growth over time. If the market is not creating further equity gains, then paying down debt will. Ideally, you want the market to be doing the heavy lifting whilst you are paying down debt.
Capital growth vs rental yield
It is rare to find a property that will deliver strong capital growth and strong rental yield; it’s usually one or the other.
Properties in high capital growth suburbs generally have lower rental returns, meaning it is likely to be negatively geared as the expenses and loan repayments exceed the rental income.
Depending on your financial situation, you might need a balance of both types of properties in your portfolio to minimise risk and ensure you have sufficient cash flow to afford to hold the properties.
Keep in mind that capital growth is what generates wealth from property over the longer term. So, if the goal is to build passive income from a portfolio before retirement, the focus should be on owning fewer, high-quality properties that deliver strong capital growth over time. But this strategy is quite risky, and it will work if the property's capital growth in the long term outweighs the loss you incur from the rental shortfall.
Diversify the portfolio
One way to minimise risk as you build your property portfolio is to invest in different regions or cities. Or diversify by investing in different residential dwelling types, i.e. a house, apartment or townhouse. Australia is not one market, and various cities and regions will perform differently during the property cycle.
The above tips are just a general guide and do not consider your personal goals, financial situation and risk profile. We recommend seeking professional advice before you make any significant financial or investment decisions. If you're not sure where to start when it comes to selecting the best team to guide you, that is where we can help.
EKR Property is a qualified property investment advisory that assists first-time investors and astute investors in sourcing, negotiating and securing their next investment property, and building a property portfolio.
We have an A grade team of professionals that we can introduce you to, such as accountants, financial advisors, mortgage brokers, solicitors and property managers.
*Australian Taxation Office data (FY 2017-18), the latest statistics available.