Property Portfolio Basics (5 Step Strategy)
Category Owners Advice
You Can Become a Property Millionaire
Building a property portfolio is like planting a tree: The best time to plant a tree is 20 years ago. The second best time is now and it's never too late to start. When invested correctly, and supported by industry experts, real estate is considered by many to be the highest-earning asset class in the world. Donald Bren ($15.b), Sun Hongbin ($9.2b), and Stephen Ross ($7.6b) are three of the richest property investors in the world and all of them built a substantial portion (if not the majority) of their wealth through real estate. However, there are many others just like them who've managed to secure financial freedom with property portfolios. Read on to find out how you can build your own.
How To Build a Property Portfolio
1. Plan, Plan, Plan
To build your property portfolio you have to have a plan. The first step in that plan is to figure out your reason why because that will help you figure out all of the subsequent steps. Ask yourself why you're going to build your property portfolio. Are you looking to supplement your monthly salary with passive income? Is it to set yourself up for a comfortable retirement? Will your real estate empire be a legacy your children and grandchildren can rely on for financial security? All of these things can be achieved with a property portfolio but each of them presents a very different level of scale.
2. Other People's Money
You may have seen the acronym OPM before in the context of wealth creation or investment guides. In real estate, OPM means laying down your own capital in the form of a deposit along with a mortgage product to reap the highest returns possible. Say, for example, you've accrued cash savings to the sum of R100,000. Many may consider investing those funds in REITs or dividend-yielding ETFs. However, R100,000 will only ever acquire R100,000 worth of shares. Whereas, R100,000 is a sizable lump sum to put towards a buy-to-let property deposit, will make a huge dent in the total bond repayment, and give you ownership of a secure asset! If you purchase the right property, your investment will begin yielding immediate returns and should appreciate at a rate at least in line with the compounding interest of your bond and in excess of inflation. Just be sure to pay off your home loan quickly.
3. Analyse Cash Flow
Once you identify an available property you'd like to add to your property portfolio, analyse its cash flow potential. Sum up the total of the expenses and the income of the rental property. Ideally, an investment property should be cash flow positive from day 1 with income increasing in the years to come based on market dynamics as well as incremental rent increases based on CPI. In your cash flow analysis, be sure to account for all of the following expenses: bond repayments, utilities, levies, property management fees, maintenance allowance, vacancy allowance, rates & taxes.
Top Tip - Ask your trusted leasing administrator about vacancy rates in the block or area for similar properties so that you can calculate the appropriate vacancy allowance.
4. Expand
After you've acquired your first investment property, it will eventually be time to start expanding your property portfolio. When identifying your second, third, fourth, and fifth properties try to diversify. That means putting your eggs in multiple baskets. It's not always a great idea to buy multiple units in a single block, or even in a single suburb. Spreading out a little can help to reduce your overall risk exposure - for example, if a natural disaster like a fire or flood tears through the suburb you don't want that to affect your entire portfolio.
5. Appreciate & Offload
Real estate investment and building a property portfolio is a long game. Over the course of a few years or decades, smart property investments historically perform well. Capital appreciation of well-maintained properties is typically strong and if held for a sufficient length of time the resale gains may surpass the value of rental income. When that time comes, be sure to consult with your real estate brokerage - they'll be able to help you offload the underperforming property and replace it with a higher-yielding property.
The Bottom Line
As with all investments, there is risk involved when investing in a property portfolio. It's vital to surround yourself with the right support - legal counsel, a financial advisor, a property management firm, and an experienced real estate agency. With the right support network, you'll be able to navigate common mistakes, maximise returns, minimise expenses, and achieve financial freedom by building your property portfolio.
Author: Paul Wasson
