9 Tips For Building a Property Portfolio
If you’re thinking of building a property portfolio here are a few simple tips to make the process easier and more profitable.
Benefits of building a property portfolio
While no investment is ever one hundred per cent fail-safe, building a property portfolio is one of the most secure ways to build wealth and security in the short and long term. Some of the benefits of a property portfolio include:
- Multiple income streams and increased cash flow — it’s a simple numbers game, by building a property portfolio you can gain rent income from more than one property, providing you with steady cash flow. Plus, if one property becomes vacant you still have income from the other properties, leaving you less exposed.
- Equity — as you build your portfolio you can use the equity from your properties to invest in further assets for your portfolio.
- Capital gains — by making smart investments in property you can enjoy access to long term capital gains.
- Security and legacy — as you look to retire your property portfolio can provide a continued income stream after your regular wage stops coming in. Plus, you can choose to sell one or more properties for a bigger cash injection.
Building wealth through real estate doesn’t have to be hard. Find out how to make a strong start and grow your property portfolio
1. Get expert help
This seems like a no-brainer but many first-time investors fail to get the right help before they start on their property investment journey. Speak to your bank or a financial advisor for advice on the best way to build your property portfolio.
2. Take advantage of equity in your home
Your mortgage provider or bank can advise you on the equity of your current home. If you’ve only recently purchased your first home you may need to wait for the equity to build up. Once your property has sufficient equity it can be used to secure a deposit on your next property.
3. Make a plan
What are your goals? How are you going to reach them? What do you want your portfolio to look like in five years time? Or ten? Or twenty? With a clear plan and detailed strategy, you’ll make it a lot further than ad hoc investment.
Not all property portfolios have the same purpose. Perhaps your main goal is rental yield, or maybe you’re looking to the long term and want to maximise capital growth. Ideally, your property portfolio should achieve both rental yield and long term capital growth, but this isn’t always achievable.
By defining the purpose and goals of your portfolio you can make better, more informed choices about which properties you invest in.
4. Sort out your finances
Before you embark on your property portfolio building journey, assess your finances and make sure you’re in a strong financial position. Your bank, financial advisor or mortgage broker can help you structure your finances in the most profitable and sustainable way and advise you on how much you should be spending on your investment properties.
They may help you to leverage equity through refinancing your current home loan and give you advice on negative gearing and other strategies to minimise tax and improve cash flow.
5. Positive gearing versus negative gearing
Negative gearing is a tax reduction strategy used by many property investors. Broadly speaking, a positively geared property is one in which the gross rental income is greater than the ongoing costs of owning the property such as maintenance, fees and loan repayments.
Meanwhile, a negatively geared property is one in which the rental income is lower than the ongoing costs of owning the property. Losses incurred from renting out the investment property can be offset against the homeowner’s income, reducing their total taxable income and subsequently reducing the amount of tax they must pay.
6. Account for all costs associated with your properties
Make sure you budget for all the expected (and unexpected) costs that come with owning an investment property.
There are more costs to property development than simply paying off a mortgage including things like council rates, management fees, insurance, maintenance and repairs. Remember to account for potential tenant-free time periods — can you afford to keep up mortgage payments if your property is vacant for an extended period of time?
7. Choose investment-grade properties
Choosing an investment property is not the same as choosing an owner-occupied property. Rather than purchasing a property that appeals to you personally, it’s important to invest in a property that has value as a rental property, meaning it needs to fulfil renter demands. An investment-grade property should:
- Be in high demand — if your property type and location are in high demand then you’ll be less likely to have an empty property and more likely to keep a steady flow of rental income.
- Be close to amenities — desirable rental properties are close to schools, shops and other facilities.
- Represent an opportunity for capital growth — rental yield is the initial goal with a rental property, but long term capital growth should also be a strong consideration.
You can find information about the property market in your area using helpful websites like corelogic.com.au which provides information on market trends.
8. Quality over quantity
Once you get into the swing of property investment it can be tempting to build out a large portfolio very quickly, but this isn’t necessarily the wisest course of action.
It’s not about how many properties you have but the value of those properties. For instance, a portfolio with a smaller number of high-quality properties may not deliver much short-term cash flow from rent but will represent higher capital growth in 10, 20 or 20 years time.
The key to building wealth through property is focusing on the long term, setting long term goals and making strategic investments with those goals in mind.
9. Build your own investment property
If you don’t see any properties worth buying, build one! There are a range of benefits to building an investment property including:
- Tax-deductible depreciation — you can claim tax deductions for depreciation on the property and its internal fittings and fixtures.
- You can have exactly what you want — the ideal property may not be out there, but by building your own investment property you’re creating your own opportunities and can cater it to suit renter demand.
- You can build instant equity — if your completed home is worth more than the initial loan you took out for it you could gain instant equity on the property and use it for further investments in other assets.
Building wealth through real estate the easy way
At BuildFast we offer a one-stop fast-tracked service for property investors. Our experienced financial team can help you get the best deal on your loan and show you how to maximise your budget. Plus, through our BuildFast Continuous Wealth Creation Strategy, we can show you how to build your property portfolio by adding a new unit to your portfolio every single year!