6 things to consider when building a property portfolio

With anything you do of importance in life, it is far better to understand what you need to do before you try and do it. Without hope and goals, we merely exist, there is nothing to strive for or look forward to. Having a goal gives direction and purpose in life, be it a small or big goal, short term or long term.

Property is no different. You must first start with a goal in mind, a tangible income goal, the income figure in retirement you would like to aim toward achieving could be $40,000 or $200,000 pa; what matters is that the figure is right for you. Once you have a goal you will need to work backwards and knowing what you want and need in your retirement, it is easier to establish a plan of action.

Once you have a goal, you need to consider your current situation. There is no point having a goal that is completely unachievable. Consider your income, assets and liabilities, your surplus income every month, your age, and your living expenses, as well as your risk appetite. You cannot enter into property investment without these fundamentals being understood. Your goal must be specific, measurable, attainable, relevant to you and focused on a fixed point in time.

In order to ascertain how achievable your goal is, you should engage the services of a mortgage broker, to determine your borrowing capacity. It is not just your current borrowing capacity either. The broker needs to be a strategist, not a transactionalist, they need to work out what you can borrow next, based on reasonable assumption of the ‘what if’ you buy one type of property over another now. It is like a game of chess, or snooker, you should avoid snookering yourself by working out a viable borrowing/lending strategy.

Fear, not purchasing well, not building a large enough property portfolio, or simply just buying a property or two, with no idea what the properties should be, all affect a goal being achieved. So, have a plan.

The type of property strategies and the number of properties of each strategy in the plan will impact on location choice, and therefore future ‘goal’ outcomes. Between 4-6 well purchased properties is better than just choosing a number like 10 properties, as a naive goal for the number of properties you want in your portfolio.

An intelligent investor realises a balance of capital growth and higher yielding properties is important. They want to avoid the risk of becoming a slave to cost of debt in their portfolio, so they purchase capital growth and higher yielding properties. Only focusing on capital growth can lead to being too negatively geared, and focusing only on higher yielding properties leads to less wealth being created.

Once you have a plan you need to research where and what you should buy. This is based on your borrowing capacity, how you can spread out your borrowing capacity to best make allocate your borrowing capacity, then the type of property, residential or commercial. Whether it be established versus new property, regional versus inner city versus middle to outer metro. If residential, whether it is best to purchase a house, unit, townhouse or apartment. If commercial, consider whether its better to buy an office space, shop, factory or warehouse for example. All of these elements contribute to a more successful approach to property investing.

Finally, seek advice from someone representing the buyer, never the seller, and never a property marketing company or developer. Use a suitably qualified, and experienced firm to guide you, do all the research for you, the sourcing of a property and negotiating on it.

There are six overarching fundamentals for you to be more successful. Have a goal, determine your borrowing capacity, create a tailored plan, undertake thorough research and due diligence, have a team around you, and continually review your plan as your life changes.

Written by Andrew Crossley.

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