Investing in property is a huge financial commitment. For most of us, getting started with one property can seem insurmountable. How do we even start to build a property portfolio?
As David Koch pointed out on this week’s show, the tip is to think outside the square. Your Financial Future segment guest, property expert Chris Gray from Your Empire, has built his own property portfolio doing exactly that.
Watch the segment for Gray’s tips and then read on for more information:
5 foundations for building a property portfolio
1. See a mortgage broker
How much can you afford to spend and when?
To start, Gray advises seeing a mortgage broker to help you do the numbers. “They are the ones who dictate how often you can keep repeating and how much property you can buy,” says Gray. a mortgage broker will help you work out what you can afford to buy and how often.
As well as assessing your finances, a mortgage broker will also help you work out your property investment goals. They will then work to find the best finance options to suit your needs and situation.
How much equity should you have in your first property before you start using it to buy another one?
An area a mortgage broker will pay particular attention to is how much equity you need in your existing property portfolio before you add to it.
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“Typically first home owners will have 95 or 100 per cent,” says Gray. “Buying your second property you might be 80 or 90 per cent. Then most investors after that, you’ve got to have at least 80 per cent in there.”
How do I apply for loans and manage property settlement?
Once you’ve found the property you want to buy, a mortgage broker will also assist you to apply for the loan and manage the process through until settlement.
Always check that a broker is licensed to give you credit advice. You can search for your broker at ASIC.
2. Assess your financial needs
Should I skew my property portfolio towards capital growth, or rental returns?
“It all depends on the person,” says Gray. “Typically, high-income people will go more for capital growth, because you don’t pay tax on the growth. Whereas, lower-income people who can’t afford the negative gearing will generally go for positive cashflow-type properties.”
A positive cashflow property investment will have the capacity to generate high enough rental returns to cover your mortgage and other costs and preferably leave extra money in your pocket.
If you’re going for the capital growth investment, you need to add properties to your portfolio that produce above average increases in value over time.
Assess what it is you want from your property portfolio and look for the right properties accordingly. Bear in mind that wealth from real estate investing is generally a long game. Unless you’re particularly handy with a hammer, residential properties are mostly not a high-yielding, short-term investment. It’s long-term capital appreciation of assets and the ability to borrow against this equity that leads to the best returns.
3. Research investment location
Where’s the best place to buy an investment property?
Another consideration is where your investment property is located. Gray recommends avoiding the CBD of capital cities because “there’s no limit of supply.”
“And most people don’t want to live in the CBD,” adds Gray.
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Instead, he recommends looking at least five-15 kilometers from the city instead. Gray says that properties closer to the CBD will be more expensive and better suited to a capital growth strategy. If you’re looking for rental yield, buying in rural and regional areas will probably suit you better.
How do I find the right property?
The ‘right’ property is one that best suits the demographic in a particular area. Gray says that speaking to local real estate agents and property managers will help you understand the local market. They will help you get an idea of what’s in demand all the time.
Agents can also tell you what local renters want so you can find a property that ticks as many boxes as possible. Things like car spaces, lock up garages, bigger bedrooms, extra bedrooms, additional bathrooms, dedicated study space, outdoor space and so on. This list will be different across suburbs and cities and certainly different across regions and states.
4. Know your alternatives
Can you invest in real estate without becoming a landlord?
There are other options besides buying a property to rent out under the traditional model. One example is becoming a short-stays accommodation host via websites like Stayz and Airbnb . These can provide good rental returns that can be higher than traditional long-term renting. As Gray points out, however, there can be risks involved.
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“You’re going to pay more money to Airbnb, it’s going to be more active management, or you have to pay property managers to do it,” he says. There’s also the risk that you won’t have ‘tenants’ in for a number of weeks, or even months. Due to the higher volume of tenants coming through, there’s also a higher risk of damage being done to the property. That will include risk to contents to – another possible drawback of going to the short-stays route is that you will need to fully furnish your investment property.
For most people, Gray therefore thinks that a traditional rental agreement with a long-term renter is better. The traditional model provides more consistency and less risk.
5. Don’t fall victim to analysis paralysis
How will I know when I’ve done enough research?
As Gray points out, if you’re not careful, researching possibly locations and properties can quickly become your life’s work. You’re spending shedloads, so you definitely want to get it right, but you don’t want too much information either.
“Then you’ll procrastinate and you won’t actually do anything,” Gray points out. “You’re never going to know everything. I’ve done it for 30 years and I still don’t know everything. So, just get enough information, get in there, and then you learn more for the second one.”
Slow and steady is his advice. Building a property portfolio is a decades-long investment and it pays to take the emotion out of your decisions.
The main thing is to begin. Getting out there and just doing “something” is Gray’s takeaway. “If you don’t do anything, you’re never going to get anywhere.”
This article contains general information only. It should not be relied on as finance or tax advice. You should obtain specific, independent professional advice from a registered tax agent or financial adviser in relation to your particular circumstances and issues.