Looking to build wealth through property investment? If you’ve thought about getting one rental property, there’s no reason you can’t begin to build a whole property portfolio.
What is a property portfolio?
A property portfolio is a collection of properties owned by one individual or a company. Generally, people start building a property portfolio by buying a home to live in, and then purchasing subsequent properties to rent out. Negative gearing is a popular tool in Australia to help minimise tax obligations while paying off an investment property.
Building a property portfolio is all part of wealth creation. Whether you make a profit from the rent you charge immediately, or whether it makes a loss in the early years, the focus is more on building your portfolio for the future. Ideally, you reach a point where your rental income exceeds any home loan repayments you need to make.
What does a successful portfolio look like?
A successful property portfolio really depends on your individual goals. As we mentioned, the idea is to build wealth, so that once you’ve paid off the mortgage on an investment property, you generate plenty of passive income. Also, you may be hoping a property appreciates in value so that you can sell it for a profit in the future. SO, the two main types of properties you would consider are:
High rental yield properties: These generate solid rent straight away, certainly enough to cover the mortgage payments.
Capital growth properties: These are the ones that may not generate huge rental returns straight away, but are expected to increase in value over time.
The best property portfolios have a mixture of both property types.
How to build a successful property portfolio
It can feel difficult to start a property portfolio, however, it’s not impossible. Here are some tips to get you started.
Establish your Goal – Understand your financial position
Obviously, buying houses is an expensive proposition. So, you need to understand your individual goals as well as your financial position. Your current financial position affects your borrowing capacity.
Every pursuit should have a clear goal. For you, it might be to generate enough rental income to pay the mortgage. Alternatively, you may want to buy a cheaper investment property that may appreciate in value over time.
Understand the risks
Investing in property can be very rewarding, but also very risky due to the considerable financial implications. When you buy property, there are always a few risks, such as the home depreciating in value or interest rate rises making your mortgage harder to manage.
In addition, there are risks around tenancy. Firstly, damage to the property. Secondly, you may have times between tenants where the property generates no income. You’ll need to be prepared to cover the mortgage during those times.
Start by focussing on income
For most people, property investments are more about creating wealth for the future. However, you should always focus on income as a first point. While many properties are negatively geared (meaning they make a financial loss which can serve as a tax deduction), ideally you want to make some money from your investment. This means you’ll still be able to maintain your lifestyle while paying a mortgage.
Consider all options for property
There is more than one way to buy an investment property and start a portfolio.
Using equity – Consider a joint venture
If you’ve generated equity in the home you live in (meaning your property is valued at more than you owe on it), you can use the equity to encourage banks to lend you money for an investment property.
If that’s not possible, you could consider a joint venture where you team up with someone to buy an investment property together. This is a great way to get into the market, but you should both seek legal advice and be very clear on investment strategies moving forward.
Consider reinvesting – off the plan options
When you buy off the plan, you can be eligible for some tax benefits. It also may give you some reductions in stamp duty, making the whole process cheaper. Always speak to an accountant and understand your tax obligations before buying off the plan, however.
Home and income (granny flat) to add rental returns
Are you using all of the space on your property effectively? If you already own one rental property, you could consider building a granny flat or self-contained unit out the back. Not only do you get another source of income pretty quickly, but the value of the home has been increased for future sales.
In between tenants, it’s a great idea to explore whether you can increase the property’s value at all. Some simple renovations can make a big difference and may allow you to charge more rent for the property.
Create positive cash flow
Overall, one of the best property portfolio circumstances is positive cash flow. This means the money coming in from rent is higher than the mortgage repayments and other expenses. This allows you to save more money, which can be reinvested further into other properties that generate positive cash flow.
How a mortgage broker can help
BrokerCo brings together the online convenience and technology of a home loan comparison tool, while also being completely personalised. You’ll deal with a real broker who works to understand your position and your goals. We can provide tailored advice to help get the most out of your home loan and start building your property portfolio. To find out more, contact our friendly team today.