In recent years there have been many people in the property sector, promoting the importance of building a successful property portfolio to create wealth for retirement.
However, the reality is that very few people succeed in building an extensive property portfolio.
The fact that only a tiny portion of people ever go on to build a successful property portfolio is revealed by the Australian Tax Office (ATO) figures.
ATO figures show that 72.8% of individuals who owned an investment property owned just one, while 18.9% of individuals owned two. Only 0.9% individuals or less than one in a hundred owned six properties or more.
The ATO figures also reveal that for more than 1.2 million of these individuals, two out of every three were negatively geared or reported a loss on their income.
Generating strong cash flow is therefore critical in the process of building a successful property portfolio, especially if you are just starting off in the property investment market.
The main reason why so many individuals fail to own several properties is that they make mistakes with their very first property purchase. This then prevents them from moving on to buying additional properties.
However, individuals who do make the correct decisions at the start off stage in property investment can go on to amass a highly successful property portfolio which will help fund a comfortable retirement.
This is why is it critical to undertake extensive research before buying your first investment property to avoid simple mistakes that can undermine a long term strategy of creating wealth through property investment.
The property still remains one of the best ways for mum and dad investors to create wealth, and this has been proven over many years with Perth real estate achieving a high level of capital growth consistently over several decades.
Houses and units seem more comfortable to understand than many other types of investments.
However, it's essential to understand how investing in property works to decide if it's right for you.
If you own a home and are thinking about diversifying your investments by developing a property portfolio, it may not be as difficult as you imagine. For some homeowners, the equity in their current property can be enough to invest in a second property.
If you're already in this position or are working towards it, here are some steps to help you start building your portfolio.
Choosing the right investment strategy to grow your property portfolio can be daunting, especially if it's your first time stepping into the property market. There are so many options to consider, and it can take a long time to weigh up the pros and cons to decipher which one is best for you.
Getting your investment strategy right, from the start, will set you on the fastest track for portfolio success; unfortunately, I have seen many, many cases where the seemingly perfect strategy has gone terribly wrong.
Regardless of the strategy that you choose, it's imperative that you understand your goals and the time frame that is required to achieve them. You also need to have some flexibility and be prepared to pivot your original strategy if needed. For example, there may be some legislative or lending changes that can affect the overall success of your strategy. Strategies come and go, but by understanding what your goals are, you can ensure that you are proactive, rather than reactive, when charting your property success.
What Is A Property Portfolio?
A property portfolio is a collection of investment properties owned by an individual, a trust or a company. Individual investors typically live in one of the properties they own and rent out the others.
In some cases, the rental income they earn on a property is greater than their loan repayments; in others, it is less. When the rental income is greater than an investment property's outgoings, the property is said to be positively-geared; when it is less, it is said to be negatively-geared.
Most people get into property investment intending to set up an income stream that steadily flows into their bank account whether they turn up to work or not, and so positive gearing is typically preferable to negative gearing.
But high competition among landlords means that it's not always possible to earn enough rental income to keep in the black. And current legislation allows investors to deduct losses made on an investment property against their taxable income, so negative gearing has some perks, too.
Why Get Involved In Property Investment?
Some reluctant Australians are asking, is it worth investing in property?
Emotions are running high at the moment, aren't they?
Australia is in a recession; there's a worldwide pandemic, international geopolitical tensions are high.
It's hard not to get caught up in the emotional turmoil considering we are continuously bombarded with bad news by the media.
Messages like job losses, businesses were closing down, the second wave of coronavirus, China hacking our computers.
However, as I've written before, this too shall pass.
In the meantime, while emotion has its place in everyday life, it should not have a place when it comes to investing.
You'll find various examples of the following chart all over the Internet showing the rollercoasters of investor emotion over an investment cycle.
How To Build The Perfect Property Portfolio?
Like many things in life, the idea of a perfect portfolio is highly personal. It depends on your goals, your personal and financial situation, and how much risk you can handle.
Your portfolio won't simply take care of itself, especially in the early stages, you need to keep an eye on your portfolio.
I have a daughter who is 18 months old. I have to keep my eye on her a lot. Otherwise, she will cause a lot of damage to herself and the things around her. The same is often true for property portfolios in their early stages. You need to keep your eye on them and help them grow and improve. If you simply buy a property and expect it to take care of itself, then I doubt you will be able to buy more property in the future.
Keep accurate finances of the incomings and outgoings of your property. Keep your eye on the condition of your property and speak to real estate agents about things you could do to increase rental income or value. Choose your tenants wisely and make sure they are paying on time and taking care of your property. Pay just as close attention to your rental manager. If they are horrible, then stack them and get a new manager.
This means that what works well for others may not be the right strategy for you. For example, some people may have made a fortune by buying older properties that they have renovated and flipped. Others may have made money by buying new houses and holding over the long term.
There are literally dozens of ways to build a property investment portfolio, but there's one strategy that trumps them all: balance.
Regardless of your situation, age or experience, balance is the one thing that can help you maximise your profit and minimise your risk. It's the one thing you need to factor in your portfolio if you want to succeed as an investor.
Investment Strategies To Build A Property Portfolio
Buy and Sell
The buy-and-sell strategy is one of the original ways to get into the property market, but without an extra step in the middle, a buy-and-sell strategy can be a little hit-or-miss, especially if done in a short turnaround time frame.
The buy-and-sell strategy is when a property is purchased and then returned to the market without any additional improvements made to increase the overall value. The problem with this strategy is that it is very difficult to achieve a larger sale price unless the property was originally purchased at a price drastically lower than the market rate. By the time the sale is complete, the majority of the profit will be absorbed by selling fees and government taxes.
So what's the step in the middle?
Pick your property
Once you've decided on your investment strategy, you can start looking at what properties are available on the market and where you want to buy.
Make sure you budget for all the costs that come with owning an investment property, such as council rates, management fees, and home insurance for landlords, as well as periods in which the property may not be tenanted.
Remember that there is always the risk with any investment in property. It's important to do as much research as you can to reduce the risk of something unexpected happening.
Speak to your bank
Your mortgage lender or bank can help you determine what your current property may be worth and how much equity could be in it. If you've only recently purchased your property, you may need to give your equity some time to grow.
Once you have enough equity in your property, you may be able to use that towards a deposit for your next property purchase.
Cash flow is king – just like in any other business.
Like many successful investors, Mr O'Neill believes that cash flow is the key to moving forward in property investment and it should, therefore, remain as a top priority for those who seek to create wealth through real estate.
However, investors must be careful not to do away with chasing capital growth altogether.
Mr O'Neill's strategy to maintain balance in his portfolio: purchase two high cash flow properties for every high growth property he buys.
"I still like to keep a minimum of 6 percent yield. It's not easy, you've got to look long and hard for it… Without cash flow, you're never going to retire anyway. I don't know why people put cash flow so far in the back in their priorities because these properties still will grow in value," according to him.
"It's like we're not going to be buying in the middle of nowhere… It just might mean you need a house or a granny flat or something with multiple incomes or (you need to be) buying it below its market value. Things like that can keep the cash flow up."
Cut Your Losses When You Need To
If your dog died, would you still continue to feed it? Then why keep a dead investment that is just costing you money?
There is a saying that says "When the horse is dead, dismount."
It sounds like a stupid saying, and it is. Who would remain mounted on a horse that was dead? But we do it all the time, and we keep dead investments because we don't want to admit we picked a dud or made a loss.
There is another saying that says "You don't make money until you sell". These people keep their properties when the value drops because they are afraid to lose money. They may keep the property for ten years before it returns to the value they bought it for, and they proclaim to the world that they "haven't lost money".
In my mind, you are losing money when you keep a bad investment because you could be making more money (and gaining more experience) with a good investment. Financial people call this "opportunity loss".
Do you hold onto investments because you are afraid to take a loss? Why not take that money and invest in a winner?
Be careful with property advice.
Throughout their wealth-creation journey, investors will come across many people who would want to tell them what they think is the best way to go, but as they go on to become more sophisticated and learned, they will be able to tune out noise and just take in all the good advice from the best people, according to Mr O'Neill.
"Everyone's got an opinion on the property because everyone lives in it. Everyone may have spent 30 years paying a mortgage, but it doesn't necessarily mean they're someone to listen to with investing because markets change. They might be stuck in an old school patent that worked 20 years ago, which won't work the next 20 years," he concluded.
"Never take advice from those that are not in a position that you want to be in.
"Less than 1 per cent of people own six or more properties in Australia – that means that less than 1 per cent of people have done considerably well with properties as well. So listening to the other 99 per cent is probably not wise."
Buy and Hold
Buy and hold is essentially what the majority of Australian homeowners already do; they buy and hold their properties (on an average, for 10.5 years).
The good news is that 90.3% of Australian homes are now worth more than when they were purchased!
The downside of this strategy is that it can take many years for a property to gain value, and unless you understand what makes an area grow in value, this can be a very slow strategy.
Choosing the right location will help you get into a profitable position sooner when you decide to sell, and it will also help you successfully rent out the property, so it's never left unoccupied.
Buying off the plan
This type of investment strategy is very popular with people first entering the investment market and for first-time homeowners.
Large property developments such as apartment buildings or land estates are set up by development companies and sold off before they are even built. Generally, a buyer can wander through a display home and choose their fixtures and fittings from a list or brochure.
A down payment is made, and once the property is completed, the loan is secured. In a few months (or even years), the owners can walk into their brand new property for the first time. Hopefully, they like it!
The problem with this kind of purchase (aside from the risk of the project not being completed if the whole development is not sold or market forces leave the developer in a difficult situation) is that often there is very little room for capital growth on the property, as the developer has factored any potential growth into the purchase price.
The second issue with this is you are absolutely not getting unbiased advice. The person selling the property is either the developer or employed by the developer, and it is in their best interest to get as much money out of you as possible.
What Should Be In Your Portfolio?
As mentioned, this depends on where you are in your investment journey, what your personal and financial situations are, and the goals you want to achieve and when.
If you're a beginner investor and on an average income, you'll want to buy cash flow-positive or neutral properties first to help ease into the game.
It's worth noting, too, that older houses in the outer fringes of capital cities generally achieve higher rental yields by virtue of their lower price points, and their typically older stock offers plenty of opportunities to increase value through renovations. Which means you might get to enjoy both rental income and capital growth.
What Shouldn't Be In Your Portfolio?
While the answer to this question largely depends on your personal finances and goals, Kingsley says it's generally advisable to steer clear of "investor stock, because there's really no appetite of an asset in the re-sale market".
These are typically identikit units in hi-rise apartment towers, with few distinguishing features.
"If it's a unit, make sure that it's in a small block, it's well-positioned, and that it's one of four or one of six," he says. "These have lower holding costs, higher demand, and are less exposed to oversupply".