Six steps to starting a property portfolio

Property is a popular investment strategy for Australians but like any type of investment, there are risks to be weighed up alongside the potential rewards. It’s vital to be well informed about the pros and cons of property investment before you begin building a portfolio.

A successfully managed portfolio can mean financial independence later in life. This is a long term game, so if property investment is something that intrigues you, start laying the groundwork early to reap the rewards in the years to come.

EDUCATION

There are many books and blogs to read; as well as courses that budding investors can take. When it comes to property investment, the more informed you are the better off you‘ll be. Talk to experienced investors, accountants and real estate agents to get current market advice.

Uninformed and naive investors can quickly find themselves in all sorts of trouble. Educating yourself helps you to avoid the pitfalls and gives you the ability to spot and take advantage of opportunities that the property market offers.

GOALS

Your investment goals will determine the strategy you employ in building your portfolio, so it is important to pinpoint your exact aims. Consider the following:

• At what age would you like to retire?
• How much money will you need to live on each year when you stop working?
• How much total income will you need to support yourself in retirement?
• What proportion of your retirement income should come from your property portfolio?

To determine how much income your portfolio needs to provide, develop a timeline based on your current age and your planned retirement age. Pinpoint the short, medium and long term goals you will need to reach to achieve that figure. This information will be vital when it comes to choosing a suitable investment strategy.

STRATEGY

There are many elements to consider when determining which investment strategy is best for your needs. They include:

• Residential or commercial property?
• Should you buy established property, new stock, or off-the-plan?
• Will you hold your properties over the long term?
• Alternatively, do you want to renovate for profit and use that profit to invest in higher quality property?
• If renovating is on the cards, what costs will be involved?
• Should you buy for high rental yield, meaning you’ll be taxed on the rental income?
• Should you buy for capital growth, which can generate significant returns over the long term?
• Can you take advantage of negative gearing? (This is usually a better option for high-income earners who plan to hold a property over the long term).

The answers to these questions will guide what type of property you’ll want to buy, and which suburbs or areas to search in. There are risks associated with various strategies that must also be weighed up.

Once you’ve settled on your goals and strategies, it’s time to consider how your portfolio might be structured.

STRUCTURE

When developing a portfolio structure, here’s what to consider:

• What is the best way to control your assets?
• Where can you create flexibility so that profits can be distributed and tax benefits maximised?
• How can you protect your assets, and yourself, from possible litigation?
• What expenses do you need to account for?

You can structure a portfolio in multiple ways, including family and discretionary trusts, under a company name and or in your own name. Self-managed super funds are an increasingly popular option. It’s important to consider which is best for you; this will depend on your goals, risk profile and if you are buying for yourself or with another person. Whichever option you choose, it’s vital to set up your portfolio in the most effective way right from the start.

HOME LOANS

It’s a good idea to speak to a mortgage broker about what size deposit you need and how large a loan you can service.

Before speaking to a broker, develop a clear picture of your financial situation including loan information, salary details, credit card statements and more. A mortgage broker will also need your credit report. Any outstanding issues should be attended to before beginning the investment process.

• What type of loan will you take out? For example, an interest only loan can maximise your available cash, but paying down the principal also has benefits. Each option comes with its own conditions and repayment amounts.
• What are the benefits of fixed-rate loans versus variable loans?
• It’s important to choose a loan that best matches your investment strategy. For example, a loan with a great interest rate might seem like a good idea – but what is the penalty if you decide to pay out early? An investor who plans to renovate and sell for profit in the short term may face a significant fee for exiting the loan early.

When it comes to repaying the loan, you must factor in:

• Are you able to meet mortgage repayments?
• If not, how will you make up that shortfall?
• What will happen if interest rates rise and your repayments increase?

Having some money or assets will assist when getting a loan. Those who already own property can use that equity to take out a loan for an additional property. Wherever possible, aim to put down a deposit of 20 per cent to avoid the added cost of Lenders Mortgage Insurance.

There’s little point in beginning your property search until you know how much you will be able to borrow. Online calculators can help, but should be used as guides only. And remember that pre-approval from a bank is not necessarily a guarantee of a loan.

OTHER FINANCIAL ASPECTS

When building your portfolio, you should also consider the following:

• What tax benefits are available?
• How can you best take advantage of these?
• What additional costs will need to be accounted for? (Legal fees, stamp duty, strata fees, property management, maintenance and more)
• Could you use an offset account to reduce the amount of interest paid on the loan?

When it comes to property investment, there is a lot to consider. Being an informed investor will put you in the best possible position to reap the potential rewards of property investment.