10 Tips for Building a Property Portfolio

 

Traditionally, Australians have preferred to invest in property as a ‘safe-as-houses’ approach – something they can see and touch that provides higher returns than many other asset classes and is also a good hedge against inflation.

 

In respect to the rest of the world, Australia has a diverse and advanced economy with latest figures showing a 2.4% GDP growth. With strong population growth ensuring strong demand, generous tax advantages and the ability to leverage property, a property portfolio is a relatively low risk, profitable option for many people from many income brackets. You might be surprised to know that one in three landlords having an annual household income of under $100,000 and around 8% of the population already own an investment property.

According to Australian Taxation Office figures:[1]

  • around 1.8 million Australians (7.65% of the population) own an investment property
  • of those, 72% own one investment property
  • 18% have 2 investment properties.
  • However, only 0.9% of investors have 6 properties or more.

As these figures show, most people stop at one or two properties and that’s really not enough to enjoy something as big as fully funding your retirement.

Here are our top 10 tips to building your property portfolio in order to achieve more financial freedom:

  1. Do the research – There are many different strategies to building a multi-property portfolio so do your research. Hit the books, join a group of like-minded individuals if you don’t think you can give it the time it deserves, engage a professional. First things first however you must speak to your bank or financial planner to see what is achievable.
  2. Young guns go for it – The younger you are when you first purchase property, the better off you’ll be in the future. Buying a smaller unit or a house in a regional area with a sibling may work for you. You might also be prepared to do some minor renovating yourself, like painting to improve your property.
  3. Be in it for the long-haul – The property market works in cycles. If we imagine these cycles as hours on a clock, 12 o’ clock is the seller’s market whereby investors accept low rental yields and high confidence, after which case the market will experience an affordability crisis and stock oversupply. By six o’clock (the other half of the cycle) there is decreasing confidence in the market, prices are lower and it becomes a buyers’ market. After this point, property prices become low enough to see rental increases and that triggers the tightening up of demand leading to price increases and eventually a swing back around to the 12 o’ clock cycle. Typically, these cycles take 10 to 12 years to complete so it can be difficult to judge – especially as the market becomes more sophisticated, history will not repeat itself so precisely. Investors must be prepared to ride through the cycles and spend time in the market in order to see a substantial gain.
  4. Have a clear plan – What’s most important to you rental yield, capital growth or both? To reach financial independence, it’s important to crunch the numbers and plan your approach, e.g.
    • How much money would you like to have each year to reach financial independence?
    • How many properties do you need to reach that amount?
    • How many properties do you need to buy in total?

Taking a step back, to buy a property one must have equity to draw from or a cash deposit. It is worth speaking with your banker or a broker to work out how much you can borrow. Reducing the amount of debt you have will also influence this amount.

  1. Remember the extras − When buying a property, you also need to take into account:
  • Stamp duty
  • Building or Development Approval fees
  • Solicitor or Conveyancing fees
  • Mortgage insurance
  • Pest and building inspections, strata reports and any other reports required to do due diligence.
  1. Diversify − Having properties in different cities, states and regional areas can spread the risk and performance scenarios.
  2. Consider using a buyer’s agent − The first three properties purchased are the most important buys when establishing a portfolio. Most investors will rely on these to leverage for other properties and based on their performance it is the difference between buying your next property in two years or waiting six years or longer. A buyer’s agent has extensive experience in the local market and can give advice on the best investment properties and where to buy based on your goals and situation.
  3. Claim the First Home Owner Grant − If you are a first home buyer, grants are available to those who are Australia citizens, are prepared to live in the property for 12 months, purchase brand new property or build themselves. These grants vary from state-to-state and information can be found at the government website.
  4. Explore all the tax advantages − There are tax advantages associated with negative gearing. Where the expenses exceed the income generated, the loss can be applied against other income, reducing tax otherwise payable. There are other tax benefits including the ability to depreciate fixtures and fittings over time. You may also be entitled to a building allowance deduction.
  5. Keep the ultimate goal in mind – Building a portfolio can ultimately lead to you being able to own enough properties that you will be able to sell half to pay off the other half giving you a long-term income stream to do with as you please. Hello property tycoon!

Building a property portfolio requires some boldness and planning to reduce risk and a commitment over the long term but the hardest step you will take is buying that first investment property. After the initial steep learning curve, your next three properties will be easier and will hopefully take you closer to financial independence and the freedom that brings.

Cohen Handler specialises in providing expert advice to property investors and with six offices nationally can provide guidance and support to grow your property portfolio. Contact us now to find the right property at the right price.

[1] ATO Taxation Statistics 2011-2010 page 13 cor00345977_2011taxstats.pdf

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