The Top 5 for Property Investors

A successful property portfolio can become your nest egg and give you financial independence in later life. To make sure that your portfolio works for you it’s important to take the time to develop a strategic approach. Here are my top five things to consider before you even start the property hunt.

What do you want your portfolio to achieve?

Before you begin pounding the pavement it’s important to understand what you want to achieve from your portfolio. Ask yourself what you would like your property portfolio to look like in five, 10 and 20 years time. A few questions that will help you to work through this include:

• Will you need your property portfolio to provide you with an income in your retirement?

• How much money will you need each year in your retirement to enjoy a good quality of life?

• How much of your retirement income do you want to generate from your property portfolio?

After you answer these questions you will have a better idea of how much annual income you need your property portfolio to generate in order to match your future lifestyle and how many years you have to achieve it.  For example, if you’re 35 years old now and plan to retire at the age of 60 then you have a 25-year timeline to develop a property portfolio that generates the income that you want to receive during your retirement years. If you’re like me and don’t want to wait until you are 60 to retire then just adjust your time line accordingly.

What’s your strategy?

Once you know how much income you want to generate then it’s time to develop your property strategy. It helps if you view each property as a piece in your overall portfolio rather than in isolation to ensure that your investments are complimentary.

 As a starting point you should evaluate the following questions:

• Are you looking to buy residential or commercial property?

• Are you looking to buy properties to hold for the long-term?

• Do you want to buy, renovate and then sell in order to achieve a short-term financial gain which you can then use to buy better quality property?

• Is your preference to buy and then renovate in order to add capital value thereby allowing you to refinance and buy another property with the increased equity?

After working through these questions you should start to develop a much clearer picture of the type of property you’re looking for. For example, if you decide to focus on buying to hold for the long term then you need to secure a property that will rent well into the future – such as an apartment in a capital city which is in proximity to the CBD, entertainment facilities and reliable transport networks. 

What’s your property portfolio structure?

Before you get carried away with the excitement of buying your first investment property it’s important to develop your portfolio structure. Firstly you need to identify who or what is going to own the portfolio.  The importance of this decision cannot be underestimated and the wrong decision could cause you plenty of grief down the track.

The major things to consider include:

• How to best control your assets

• Protecting your assets against any litigation claims

• Keeping flexibility in order to be able to distribute profits and maximise tax benefits

• Understanding the expenses you will need to meet to maintain the structure.

This process may take you some time in order to determine the best structure for you. There are several different structures that you can hold your properties in including your own name, companies, unit trusts, family trusts and discretionary trusts, for example.

It’s important to make sure that you get this right from the beginning because it can be very costly to try and change ownership once your portfolio is established. It’s advisable to have a good chat with your accountant about your current situation and long-term plans before you start buying properties so that you can set up your asset structure properly from the beginning.

How are you going to finance the portfolio?

Correct financing is also a critical part of a successful property portfolio. The key is to set up the financing to ensure that you receive the maximum tax benefits available and can easily meet the mortgage repayments now and in the future.

To start with you need to evaluate whether you’re going to take out an interest only loan or whether you’re aim is to also pay down the principal. The repayment amounts and conditions between these options vary significantly and it’s vital that you discuss the pros and cons with your accountant, finance broker or bank to choose a loan that works best for you.

Don’t forget to make sure that your loan matches your investment strategy. There’s no point taking out a loan with an attractive interest rate that has a large penalty for paying out the loan early if you’re planning on a buy, renovate and sell strategy where you’re likely to want to exit the loan within a few years.

I always encourage my clients to put down a 20% deposit to avoid paying mortgage insurance. The 20% deposit also gives you a financial buffer in an economic downturn and allows you a little breathing space should you need it. 

I also advise my clients to evaluate whether they can meet mortgage repayments 2% above the current rates to make sure that they are capable of easily paying these costs when rates start rising. If you can meet these higher repayments then why not get ahead on your loan? Start making payments 2% above the current rates into your offset account from the beginning to increase your buffer and help you put additional funds aside towards a deposit for your next purchase.

Don’t wait too long

My final point is to make sure that you take action and commit to a plan. There’s no point dreaming about financial security for the future while putting off developing any strategies to actually start your investing. Ever heard the saying “procrastination leads to pain”? I can assure you that when it comes to investing it does.

In general Australia has experienced a relatively flat real estate market in recent years but we’re already seeing prices starting to move again as investors regain confidence in the marketplace. 

If you don’t get serious about your property portfolio now then you risk the market leaving you behind as it did with so many during the last property cycle.  Your 20% deposit may not buy you the property that it will today if you leave it too long, as many who procrastinate will discover. 

Get serious and start your planning today and you’ll reap the rewards in your future