August 31, 2017 | What you need to know: Property Portfolio Fundamentals
If achieving a successful, multi-property investment portfolio were simple, everyone would be a multi-millionaire. Instead it requires a great deal of strategy, hard work, risk management and time. Here we provide you with nine key areas that you need to consider when building your own property investment portfolio:
1) Planning is key
Property investors should first identify the reason (purpose) for creating a property portfolio and what they want to achieve from it in the future. Is it capital growth you desire or high yield returns? Once you understand your goals, put together a strategy to suit your financial capacity, requirements, timeframe, availability and desired outcomes.
2) Build and consult with your A-team
Before the property search begins, seek assistance from experienced advisors who can help you structure the correct foundations and advice for your requirements. This includes:
- Financier: to confirm funding options.
- Accountant / Lawyer: to determine the correct entity structure for the property.
- Accountant: to advise on all tax information.
- Foreign Investment Review Bureau: to confirm purchase options (if the Client is not an Australian Citizen or has permanent residency).
- Buyers Advocate: to prepare the best possible strategy and manage the acquisition.
- Conveyancer / Lawyer: to review and advise on the Contract of Sale and Vendor Statement (Section 32).
- Building & Pest Inspector: to determine the structural integrity of the property.
- Property Manager: for an accurate rental appraisal and ongoing management of the property.
- Architect / Town Planner / Council: to determine amendments and improvements to the property (if required).
3) Choose the right suburb
Don’t restrict yourself to areas that you are only familiar with as these might not be the best options for wealth creation. Explore different areas to get a good idea of the overall market place and select a growth suburb by researching which areas have had strong capital growth, have great lifestyle options and amenities (a place where people want to live), close to public transport (especially a train station), close to schools, hospitals and freeway options. Keep an eye on up-and-coming areas (ripple suburbs) and research whether the local council is forward thinking and will invest in future infrastructure.
4) Get the best property
Choosing the right dwelling is one of the most important factors to a successful investment property portfolio. Some major features to consider are;
- Style of the property.
- Land size.
- Floorplan flow.
- Outdoor connectivity.
- Natural light.
- Heating & cooling.
- Off-street parking.
- Structural condition.
Before you commit to buying a property, it is imperative that you research the capital growth performance of the actual property and get comfortable with comparable sale prices.
6) Portfolio expansion
Once your first investment starts creating equity, consider adding another property and create a portfolio. If you are in a financially secure position and comfortable with having slightly more risk then start building. Don’t worry about the size of your portfolio, focus on the quality and performance of it. You can achieve much better results from less (high quality) properties as opposed to more (poor quality) properties.
Diversifying your property portfolio is crucial as it avoids the pitfall of putting all of your eggs in one basket and spreads your risk profile. You can diversify your portfolio through a number of ways such as:
- Locations / suburbs.
- National states.
- Dwelling classes.
- Price points.
8) Property Portfolio health check
It is imperative to review the performance of your portfolio every 6-12 months to ensure it is providing capital growth (creating equity), your rental income is in line with the market value and the highest it can possibly be. This can be reviewed with your Buyers Advocate, your Financier, a certified Property Valuer and your Rental Property Manager.
9) Transacting in your portfolio
If you have a high-grade and well performing property, don’t feel the need to sell it just to switch to another property. The transaction costs are expensive and will hinder your wealth creation plan. Secure an A-Grade investment property and hold onto it for as long as possible (10 years plus). These expensive transaction fees include;
- Multiple stamp duties.
- Selling agent commissions
- Marketing costs.
- Property styling fees.
- Capital gains tax.
- Bank fees.
- Conveyancing fees.
In the event you have already secured a poor-performing investment property and the future gain is minimal, you will need to bite the bullet, wear the transaction costs and offload the property as soon as possible. In these circumstances, it is better reinvesting into an A-Grade asset as the future opportunity cost of not having growth will far outweigh the transaction costs over the long term.
Want assistance building your Property Portfolio?
If you are building a property portfolio and would like a free consultation to make sure you have the best advice, please provide your details below and one of our advisors will be in touch.