Is it really possible to develop financial wealth by building a substantial property portfolio in Australia today?
The answer is yes. It’s simple, but it’s not easy. And that’s not a play on words.
It’s simple if you do what many other savvy property investors have done and built a substantial asset base of investment-grade properties that generate sufficient passive income to give them financial freedom.
Note: Building a successful property portfolio is not easy, as the majority 92% of Australian property investors never get past the first or second investment property.
But the better way of looking at it is that if tens of thousands of Australians have managed to develop financial freedom through property, there’s no reason why you shouldn’t be able to build a multi-million property investment portfolio yourself.
So, here’s everything you need to know about building a successful property portfolio.
What is a property portfolio?
The real estate portfolio definition: A property portfolio is a collection of property investments owned by an individual, a group, a trust or a company.
Of course, investors typically live in one of their properties and rent out the others.
There are many benefits to building a portfolio of investment properties as opposed to either owning no properties or owning just one investment property.
Here are four of those benefits:
1. Financial freedom
It has become clear that Aussies can’t rely on the government to look after them in their old age so more and more of us are looking at securing our own financial future through owning investment properties.
It’s hard to achieve financial freedom with just one investment property as the income, even for those positively geared, isn't enough to also cover any other financial commitments.
Having several investment properties, however, with multiple rental incomes and multiple opportunities, can really set you up financially.
Of course, your financial freedom won’t depend on owning a particular number of properties – more importantly will be how much equity you have, and how hard your properties are working for you bringing in rental income.
I’d rather own one for Westfield shopping centre than 50 properties in regional Australia.
2. More equity
Obviously, the more properties you own, the more equity you have access to as they increase in value.
3. Diversification
Another great thing about having a property portfolio is the ability to diversify your investments which allows growing your portfolio faster.
There is a risk inherent in owning several similar properties in one area because if one property type or area doesn’t grow then you don’t have the equity to invest in more properties.
But if you diversify your properties and scatter investments in different high-growth locations and spread in our 3 large capital cities and investing in different types of properties you’re more likely to be able to hedge your bets - if one area declines or stagnates for a while but another one grows you’ll still have access to increasing equity.
Tips: Think of it like putting all your eggs in one basket.
Diversification helps to protect against risk.
4. Multiple streams of income
Much like more properties in a portfolio give diversification, having a property portfolio rather than one property also means you’ll have several streams of income.
If you have a vacancy in one property your others are all still earning a rental income, and your income gap won’t cause quite as much stress to your cash flow because there is cash flow still coming in from elsewhere.
What does a balanced portfolio look like?
When it comes to property investment, most investors have the same goal: financial freedom, i.e. a “cash machine” from a property portfolio which pays for itself while also consistently growing in value.
To do this you’ll need a portfolio of properties with a mixture of properties with high rental yields and properties that are more likely to give high capital returns.
Note: Building a property investment portfolio takes many years and the first stage involves building your asset base with high-growth properties and then, over time, you can add higher-yielding properties to balance out your portfolio.
Put simply… cash flow will keep you in the property game, but it’s capital growth that will get you out of the rat race.
Rental yield is the annual income generated from rent as a percentage of the property’s value.
However, while most investors chase rental deals by buying in secondary locations I prefer to invest in commercial properties that have high hills and still an element of capital growth.
Meanwhile, high capital returns, which is simply the return on investment, are more likely in aspirational suburbs with a long-term family appeal or areas that are ‘up-and-coming’ and gentrifying.
A balanced portfolio is a portfolio that is a mixture of the two and which also has enough diversification (as we discussed earlier) to reduce exposure to any location-specific market downturns.
What shouldn’t be in your portfolio?
I’d generally advise that any property investor steer clear of what I call “investor stock” - you know … those cookie-cutter-style units in high-rise apartment towers, with few distinguishing features.These have a long history of poor capital growth.
This may at first sound counterintuitive…
Why avoid “investor stock”, but these properties which are typically built by developers to make a quick profit and sell on to investors are very different to “investment grade” which are properties that outperform and deliver wealth-producing rates of return.
15 tips to start building a property portfolio
Attaining wealth doesn’t just happen, it’s the result of a well-executed plan. Planning is bringing the future into the present so you can do something about it now!
You see… building a strongly performing property portfolio is a process that takes begins with education, and then building a Strategic Property Plan to get you to your end goal.
So here are 15 tips that should help cover everything that you need to think about for how to build a property portfolio.
1. Know why you’re investing in property
The first tip to help you on your property investment and property portfolio-building journey is to answer this question:
Why are you choosing to invest in property rather than any of the other investment asset classes such as shares?
Why?
Because most investors know why they want to invest in property but some do it for the wrong reasons.
Property investing is not a competition - buying an investment property just to keep up with friends is not a good enough reason to take the plunge.
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2. Understand all the risks involved when investing in property
Just because prices have been growing consistently for a number of years doesn’t mean they’ll go on indefinitely.
Note: The truth is that property growth in value is rarely consistent and linear.
Some years you get growth spurts and in other times it’s stuck in the mud.
In short, capital growth is hard to predict.
You could also face vacancies or tenants that default and destroy your property.
While there are ways to reduce these risks, they, unfortunately, do remain a part of property investing..
3. Be prepared to be in it for the long term
Investments don’t rocket overnight.
Even if you bought in the right area and picked the right property, there’s no guarantee that you’d see growth come through quickly.
While some areas may experience rare short-term surges, the majority of suburbs go through periods of slow to no growth before values rise.
Therefore, you’ll need to be prepared to hold your property for at least one cycle of around 7 years if you want to make a solid gain.
This means you need to ensure you have a solid enough cash flow to maintain the property within a long-term investment strategy and avoid selling prematurely.
4. Learn everything that you can
While you’re building your deposit, continue to learn everything you can about property investing.
Buy a few books from a range of authors to get a variety of opinions but be cautious of expensive courses that promise to teach you everything, it’s often not true.
5. Get your finances sorted as soon as you can
Property investing is a game of finance with some houses thrown in the middle, so make sure you create a budget to help you live well within your means - stretching yourself too thin puts your whole portfolio at risk.
Tip 6: Set an end goal
Tips: You need to set an end target so that you have something to aim for.
Whether your target is a passive income of $2,000 per week or $200,000 per year by the time you retire, or whether it's something more directly related to your overall wealth.
You can then work out how to achieve it and pick strategies, properties and budgets to suit.
By setting an end goal you’re helping to ensure that your investment strategy is focused and structured.
It will also give you something to refer back to when you need to make a difficult decision.
7. Focus on your income
To build a property portfolio you’re going to need to leverage and gear by borrowing from the bank.
Note: While banks love to see that you have equity in your home or other investment properties they will require you to prove serviceability to borrow more funds.
This means you’re going to need to have a secure day job and strong income to make the banks comfortable in lending you more money.
Over time you won’t have to go out to work because your properties will be working for you bringing in cash flow, but again, this will take time.
8. Only buy properties with strong owner-occupier appeal
Note: Owner-occupiers make up around 70% of our property market, so it makes sense for investors to only buy properties that would be in demand from these buyers.
Buying a property that would only appeal to investors or tenants will greatly limit your capital returns because demand would be much lower.
To do this you need to look at the suburb, neighbourhood, local amenities, and liveability because its things that help to drive good capital growth.
In the long term, it's these properties that will outperform versus “investor stock.”
9. Start your process with ‘buy and hold’
Start with the basic strategy of buying and holding property investments to get capital growth.
Capital growth is the ants’ pants of property investing so don’t look at making quick profits by flipping.
Over time you can introduce other investment strategies such as adding value through renovations or development
10. Identify when someone has a vested interest
The most noise in the property investment industry comes from people trying to sell you something.
Note: While not all of them are sinister, you will encounter plenty of well-meaning individuals who are simply mistaken.
Then there is the new breed of property investment “gurus” who haven’t really got a track record but have built fancy websites and large Instagram followings from overseas paid “friends.”
Sometimes it’s hard to know who to trust and who to ask for investment advice, but being able to recognise when someone has something to gain from your investment decisions helps you know how to protect yourself and your investments.
11. Don’t just buy in your own backyard
Leave your emotional connection to your local suburb at the front door, the best investments are often further afield, not just in places we already know and are comfortable with.
Consider looking at growth areas in different property markets across the country to work out what the best investment is to suit your budget.
12. Buy existing, not new properties, preferably with renovation or development potential
As a general rule, don’t buy a new property.
New properties come at a premium and like driving a car out of the showroom, can drop in value soon after purchase.
Instead, you should look for existing properties, ideally with renovation or development potential so you don’t have to wait for the market to do the heavy lifting – you can “manufacture” some capital growth.
13. Target properties with character
If you can get an old period or character house, they usually make great long-term investments, because of their scarcity and wide appeal.
14. Think about the neighbourhood
It used to be the case that the closer to the CBD, the more convenient the property would be for tenants and therefore those properties have a huge demand drawcard.
But if the Covid-19 pandemic has taught us anything, it has taught us the importance of the neighbourhood we live in.
Gone are the days when our ‘home’ was simply the place we rest our heads.
Nowadays, buyers are looking for properties that are a short trip to a great shopping strip, your favourite coffee shop, amenities, the beach, a great park.
15. Make sure you understand the market for supply and demand
Prices rise when demand exceeds supply, so you’ll want to make sure there is the highest demand-to-supply ratio in order to get great returns.
And look for a market where there is strong demand from a wide range of prospective buyers creating sufficient market depth to avoid the volatility we tend to see in small regional areas or country towns.
