Scaling up your property portfolio

Scaling up your property portfolio

When you commit to building your wealth through residential property investment, it’s essential to have a clear vision and start with the end in mind. You may want to create an additional income stream, gain financial security in retirement, steer your own ship with a self-managed superannuation fund, reduce income tax obligations or avoid the government’s old-age pension.

I like to think of this major life goal as being Destination Freedom - the end point where you get to enjoy all the rewards of making your money work for you, rather than the other way around. For some people, this really is an actual destination - a long awaited trip to Paris or cruise down the Nile - but for others, it’s a point in time where they can stop answering to others and live the life they’ve dreamed about… The key here is choice - and it comes back to good old fashioned planning.

Know where you’re going - and how to get there

Once you’ve decided exactly it is what you want to do - and put a dollar figure on it - you can discover how a residential real estate portfolio can become the vehicle to help achieve your desired outcome. Strategic planning is essential at this stage using the following criteria:

  • How do your property investment goals match your current and future financial commitments?
  • What surplus income and current asset base do you have available for investing?
  • How can your investments reduce your income tax obligations via a tax variation?
  • What cashflow percentage will you need to meet your personalised residential investment goals?
  • What time frame do you have to achieve your goals, factoring in your transition from paid to unpaid work?

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Building your portfolio - the first steps…

A spread of assets amongst different areas in Australia is essential for maximum portfolio growth, not to mention being an essential risk management strategy. New and established investors must seek out expert advice, from finance to property choice and your individual strategy - and not just from one source either. Make note of what you’re being told and ask yourself whether it adds up. Put it to the sleep test and if you’re still awake 8 hours later, it’s not for you.

  • Have your numbers done and discover your true borrowing capacity - make sure your lender does worst case scenario repayments.
  • Do your due diligence on the property market (both local and national) - is this an area that’s grown at a rapid pace, from out of nowhere? The best indications are that it will fall again equally fast
  • Don’t put all your eggs in one basket - allow for a mix of property types across the country to safeguard your wealth
  • Determine your risk profile - are you looking to build an investment portfolio that’s conservative, balanced or high risk?
  • Protect yourself against financial hardship by maintaining a cash buffer against each of your investment properties to help you weather any storm. I suggest a minimum of 3 months’ worth of expenses (about $15,000-20,000) which will also safeguard against changes in the market.

The need for balance in your portfolio

We’ve all heard about that one investor who has a massive nationwide portfolio, but not much to show for it from a financial perspective. A bigger portfolio isn’t necessarily better - especially when it’s packed with second-rate housing you have to rent out at bargain basement prices. It’s better to safeguard your higher performing investments than to use their equity and make a risky purchase. 

Choose a variety of property types, from stand-alone houses to apartments or duplexes, across a spread of high yield locations and you’ll achieve greater results.

The gearing process can also be utilised to balance your portfolio, by investing in positively or negatively geared properties, depending on your goals. You may look for a property offering a lower cashflow, but with possibilities of achieving significantly higher capital growth and boost your income from that perspective.

Taking care of business - maintaining your property portfolio

Holding a property portfolio should be treated as you would a business - keeping an eye on progress, with annual reviews scheduled in as non-negotiable.

  • Always keep your tax variation up-to-date - the key to my property investment cashflow strategies. It's an average of $200 in an investor's pocket each week, paid back to you via PAYG or BAS. This 'mini tax return' is then used to meet the gap on mortgage repayments, rather than having to find cash from your own reserves. If you’ve changed jobs throughout the year, your tax variation will need to be updated accordingly.
  • Your investment property may be on a 12 month lease, but annual rental reviews should feature in the contract. Ask your property manager to look into local rents to ensure maximum return on investment.
  • Any improvements or upgrades to your investment property need to be reflected back via your depreciation schedule.
  • Annual insurance premium and council rate increases will affect your bottom line and may require a rent rise.
  • Whether you’re on a fixed or variable mortgage (or a combination of both), there’s always an option to go back to your broker and look at refinancing. Even with fixed mortgages, there can be ways of breaking out if another deal is attractive enough to cover any additional costs. Every extra bit of interest paid eats into your profits so save money where you can.
  • Perhaps you’ve become a parent and you’re now based at home full-time, or maybe you’re at the other end of the scale and you’ve finally left the workforce. Review your insurance premiums accordingly - they’re not much use if the terms and conditions are contingent on your employment status. Cross it off the ‘to do’ list before it becomes a problem.

To get the benefits of a property portfolio working in harmony, you need to keep your end goal in mind. Good advice is essential along every step of the way, as is that all important annual review. With the right strategy in place, you’ll reach Destination Freedom - whatever it may look and feel like to you.

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