Property is a popular investment option for Australians, but like with any investment, there are risks to consider as well as possible rewards. Before you start establishing a portfolio, you should be thoroughly informed of the benefits and drawbacks of property investment.
A successfully managed portfolio can mean financial independence later in life. This is a long-term game, so if property investment is something that intrigues you, start laying the groundwork early to reap the rewards in the years to come.
If you own a home and want to diversify your investments by building a property portfolio, it might not be as tough as you think. For some homeowners, the equity in their current home may be sufficient to invest in a second home.
The difference between the value of your home and the outstanding mortgage balance is your equity (which includes available redraw funds). So, if the value of your home has improved since you bought it, and you've also paid off a portion of your mortgage, you'll have equity that you may use to buy your second home.
Would you like to speak to a specialist? Book a complimentary discovery session by calling: (03)999 81940 or emailing team@klearpicture.com.au.
If you’re already in this position or are working towards it, here are some steps to help you start building your portfolio.
The concept of a perfect portfolio, like many other aspects of life, is very personal. It is determined by your objectives, personal and financial circumstances, and risk tolerance.
This means that what works well for others may not work well for you. Some people, for example, may have made a fortune by purchasing older buildings and renovating and reselling them. Others may have made money by purchasing new homes and holding them for a long time.
There are thousands of strategies for building a property investment portfolio, but one technique stands above the rest: balance.
Balance is the one element that can help you maximize your profit while minimizing your risk, regardless of your situation, age, or experience. If you want to be a successful investor, you must include it in your portfolio.
What exactly is a property portfolio?
A property portfolio is a group of investment properties owned by an individual, trust, or corporation. Individual investors usually live in one of their properties while renting out the others.
In some circumstances, the rental revenue from a property exceeds the loan instalments; in others, it is less. When rental revenue exceeds outgoings on investment property, it is considered to be positively geared; when it falls short, it is said to be negatively geared.
Most people invest in real estate to create an income stream that will go into their bank account whether they show up to work or not. As a result, positive gearing is usually preferable to negative gearing.
However, due to the high level of competition among landlords, it is not always possible to make enough rental income to stay in the black. Furthermore, current legislation permits owners to deduct losses on investment properties from their taxable income, so negative gearing has certain advantages.
How does a well-balanced portfolio appear?
When it comes to real estate, most investors share a common goal: to create a portfolio that pays for itself each month while continually increasing in value.
To do this, you'll need some properties with high rental yields as well as some with strong capital returns, as it's uncommon to find both.
The former can be found in rural working cities like Geelong, Ballarat, or Bendigo, tourist hotspots like Cairns, or any other city that attracts a big number of people to live on a short-term basis - and can give yields of up to 7%. The latter are found in aspirational areas with long-term, family appeal and can provide capital growth of up to 5-10% each year.
Balance can also be attained by following a diversification policy. Purchasing properties in several states reduces your exposure to location-specific downturns, and investing in both residential and commercial real estate will help you weather storms in either market.
How can I create a well-balanced portfolio?
While all roads lead to Rome, each investor's trip to the promised land of good cash flows and long-term capital growth will be slightly different. And they'll have to take their time because investing in real estate is a long-term strategy, not a get-rich-quick scam.
Contact your bank
Your mortgage lender or bank can assist you in determining the value of your current home and the amount of equity it may contain. If you just bought your home, you may need to give your equity some time to build.
When you have enough equity in your home, you may be able to utilize it as a down payment on your next home.
Establish your investment strategy
Are you seeking for rental income or capital growth when it comes to investing in real estate? You should ideally have a strategy in place that provides both, but this is not always attainable.
A favourably geared property is one in which the gross rental income exceeds the continuing costs of ownership.
If you have a large income, you may prefer to prioritize capital growth because you are confident you can make the mortgage payment. Some investors, on the other hand, seek to negatively gear their properties in order to lower their tax bills at the conclusion of the fiscal year.
Negatively geared houses have rental income that is less than the ongoing loan repayments and other expenses. The losses sustained while renting the investment property can subsequently be credited against your wage, lowering your total taxable income and, as a result, the amount of tax you must pay.
Choose your property
Once you've settled on your investing approach, you may start looking at available homes and where you want to buy.
Budget for all expenditures associated with owning an investment property, such as council rates, management fees, and landlord home insurance, as well as periods when the property may not be rented.
What do you hope to accomplish?
You could choose a more aggressive or more conservative strategy to expand your property portfolio, depending on the objectives you wish to achieve, the state of your finances, and the level of risk you are willing to take. In either scenario, the approach you take must be carefully considered and in line with the exact goals and level of risk you are willing to take. If you can't afford to keep all of the properties in your vast real estate portfolio, what's the point of building such a large portfolio consisting of investment properties? In a similar vein, you need to have an understanding of the level of investment that is suitable for you in order to be able to take the necessary amount of calculated risk without restricting your potential. It is essential that every piece of real estate you invest in serves a particular purpose and contributes to your larger objective; you should avoid buying properties only for the sake of expanding your portfolio.
What is your initial investment?
You might have an investment budget of $50,000 to $60,000, or you might have a budget of $200,000 to invest. You should be able to buy one house at a bargain with $50,000, and then use the equity in that house to buy another house anywhere from six months to a year later (if your lender will let you). You won't be able to buy multiple investment properties with a single down payment right once, but with the appropriate strategy, you could be able to do so over the course of time. If you had additional finances, say $200,000, you could be able to buy four houses for a price that is lower than their current market worth. You might then use the equity from those four houses to buy four more houses anywhere from six to twelve months later. Although it is possible to acquire a home with a smaller down payment, you will still be required to pay for the cost of lenders' mortgage insurance. This not only adds a considerable expense to the investment but also extends the amount of time it takes to drain equity from the property. Is it smarter to put what you have now into investments or to put off making any decisions until you have saved up more money? Is it possible to generate a property deposit utilising alternative sources of funds or assets instead of a traditional bank account? In any event, the rate at which you can expand your real estate portfolio is influenced by the amount of money you are able to save and deposit over time.
What kind of properties are you interested in purchasing?
Invest in "bread and butter properties," often known as assets that have the potential for long-term growth. If the value of your properties increases at a rate of 5% per year, your investment portfolio will pay for itself in the background while you concentrate on living your life. You should always acquire below market value to build a position in your net worth from the beginning and to leave a buffer in case you need to sell quickly. This is in addition to purchasing assets that have the potential for growth. As a consequence of this, it is essential to stay away from all bargain cash cows, and one should not assume that all properties with positive cash flow make for ideal long-term low-risk investment prospects. Investing in real estate that generates a cash flow that is either neutral or positive means that your portfolio will take care of itself and will not drain your personal cash flow on a weekly basis.
How has your finance been set up?
It is essential to put in place the appropriate financing structure right from the beginning of your investing career. It would be a waste of money to purchase your first home only to find out a year later that you are unable to use the equity in it to purchase another property. If you choose the right broker who has experience in financing large property portfolios, you may be able to easily establish a large portfolio, however if you choose the wrong broker, you may become stuck after buying only one or two properties. It's possible to say the same thing about your whole success team. The correct kind of financial advisor, accountant, lawyer, and buyer's agent will assist you in accomplishing your goals and work with you to do so. Choosing the wrong ones, namely those that do not have any knowledge or experience in the method of real estate investing that you have selected, will not contribute in any way to your success.
What attitude do you have?
Are you committed to achieving all that you set out to do? Do you believe that those are feasible options? You can be hesitant to invest because you are afraid of the potential outcomes, or you might not want to invest in properties that you personally would not choose to live in. Either of these reasons could be causing your hesitation. Negativity and fear will only serve to hold you back, regardless of the situation. Remove your anxiety and replace it with thoroughness by conducting in-depth research on the market and your finances. If you make the appropriate acquisitions in the appropriate sequence, in accordance with your objectives and the suggestions of your success team, you will reduce risk to the greatest extent possible. After that, all that is left for you to do is remain steadfast to your plan and courageously put it into action.
Education
Aspiring investors have access to a variety of resources, including reading material in the form of books and blogs as well as educational programmes. When it comes to making money off of real estate investments, having more knowledge can help you succeed more often than not. Talking to seasoned investors, accountants, and real estate agents is the best way to obtain current market guidance.
Investors who lack the necessary knowledge and experience may quickly find themselves in a difficult situation. By educating oneself, a person is able to avoid pitfalls, detect opportunities, and make the most of those opportunities in the real estate market.
Goals
It is essential that you establish your investment objectives in as much detail as possible since these objectives will play a role in the strategy that you adopt to construct your portfolio. Take into consideration the following:
- When would you prefer to retire?
- How much money will you need to put away each year if you no longer have to worry about paying bills?
- How much of a total income would you need to support yourself after you start your retirement?
- What percentage of your income during retirement should come from your properties in your real estate portfolio?
Create a timeline based on your current age and your planned retirement age to determine how much income your portfolio needs to provide. Determine your short, medium, and long-term objectives in order to reach that figure. This information will be critical when deciding on an appropriate investment strategy.
Strategy
When selecting which investing strategy is appropriate for your requirements, there are numerous factors to consider. They are as follows:
- Is the property used for business or residential purposes?
- You have the option of purchasing either existing stock, fresh stock, or off-the-plan.
- Will you keep your possessions in the long run?
- Do you want to renovate the property in order to make a profit and then reinvest the money you make in real estate of a higher quality?
- What would the expenditures be if you decide to renovate?
- Should you acquire a property with a high rental yield, even though this will require you to pay taxes on the revenue generated by the rental?
- Should you acquire anything for its potential to appreciate in value over time, which can result in significant long-term returns?
- Can you benefit from negative gearing? (This is usually a preferable alternative for high-income earners who intend to keep their property for a long time.)
The responses to these questions will assist you in making a decision regarding the kind of residence you wish to purchase as well as the suburbs or locations you should look in. It is essential to take into account the dangers that come with the various alternative procedures.
After you have settled on your objectives and procedures, it is time to consider the structure that should be used for your portfolio.
Structure
Here are some things to think about while creating a portfolio structure:
- What is the most effective strategy to manage your assets?
- Where can you add flexibility to maximize profit distribution and tax benefits?
- How can you shield your assets and yourself from potential legal action?
- What expenses must you account for?
It is possible to organise a portfolio in a number of different ways, such as under the name of a corporation, in your own name, or under the name of a family or discretionary trust. There has been a recent uptick in the use of self-managed super funds. It is essential to determine which option is best for you; this will depend on the things you want to achieve, the level of risk you are comfortable with, and whether or not you will be purchasing the item alone or in conjunction with another person. No matter the path you decide to take, it is essential to launch your investment portfolio in the most effective way possible.
Home Mortgages
It is in your best interest to consult with a mortgage broker regarding the size of the down payment you will be required to make as well as the amount of the loan you will be able to afford to make monthly payments on.
Before you visit with a broker, compile a detailed picture of your current financial situation, including information on loans, numbers regarding your pay, statements from credit card companies, and any other relevant documents. A mortgage broker will also need to see your credit report in addition to that. Before commencing the process of investing, it is important to resolve any outstanding difficulties that may arise.
- What sort of financing are you intending to apply for? For instance, a loan that solely charges interest can help you make the most of the money you have available, but paying down your debt also has its merits. The terms and the amount that must be repaid differ depending on which option is selected.
- What are the benefits of loans with fixed rates as opposed to loans with variable rates?
- It is essential to choose a loan that corresponds with the investing strategy you intend to pursue. For instance, it could seem like a good idea to get a loan because the interest rate is quite cheap; nevertheless, you should find out whether there is a penalty for paying off the loan early. A hefty penalty could be levied against an investor who pays off their loan too soon and then goes on to renovate the property with the intent of selling it at a profit in the near future.
When it comes to debt repayment, you must consider:
- Can you afford to pay your mortgage?
- How will you make up the shortfall if not?
- What would happen if interest rates increased along with your payback amount?
Having some money or assets in your possession will make it easier for you to obtain a loan. Those who already have an investment property can use the equity in one property as collateral for a loan to purchase another investment property. When buying a home, it is best to have a deposit of at least 20 percent so that you can avoid paying for Lenders Mortgage Insurance.
It is a waste of time to begin your search for a house before you have a good idea of how much money you will be able to borrow. Calculators found online can be helpful, but it's important to remember that you should only use them as a reference. Bear in mind, as well, that the pre-approval of a loan by a bank is not the same thing as a guaranteed loan.
Would you like to speak to a specialist? Book a complimentary discovery session by calling: (03)999 81940 or emailing team@klearpicture.com.au.
Other Financial Considerations
When constructing your portfolio, keep the following in mind:
- What tax advantages are available?
- How can you make the most of them?
- What additional expenses will be incurred? (Legal fees, stamp duty, strata fees, property management, and maintenance, among other things)
- Could you utilize an offset account to minimize your loan interest payments?
When it comes to investing in real estate, there are a number of different things to consider. You'll be in the best position to reap the rewards of real estate investment if you educate yourself about the market before you make any purchases.
In the end, the rate at which you add properties to your portfolio will be directly proportional to the perspective you choose. If you put your mind to it, you will soon be able to see the accomplishment of your objective materialising in front of you. At Klearpicture, we have seen investors who started with very little and traded in their car to earn a deposit build larger portfolios than individuals who started with hundreds of thousands of dollars but never completely committed to living out their ambitions. The investors who started with very little and traded in their car to earn a deposit were able to build larger portfolios because they were more focused on achieving their goals.