Wanting to begin building an investment portfolio, but unsure where to begin? The below steps are 5 key pieces of advice for any budding property investor who wants to kick start their journey.
1. Be clear on your investment objectives
The location and type of property you purchase will determine what you achieve. When you begin your search for a property, the first question you need to ask yourself is, “what do I want to achieve?”.
Two common investment strategies which people adopt are cash flow positive investment strategies or a strategy to develop maximum capital growth. It is possible to achieve both, however being clear on your goal will dictate where you should invest.
The most common approach is to identify a property with strong capital growth potential, but also one that leaves investors with a neutral or slightly positive cash flow after tax deductions have been applied.
2. Look at your finances
It’s crucial that before you begin the property purchasing process that you understand your borrowing capacity. Make sure the bank will support you before you commit to any property contracts unless they have a ‘subject to finance’ clause.
One thing to consider when organising your finance is the way you utilise your borrowing capacity. You might have a purchasing power of $1.2m, however purchasing a property for $850,000 may mean you limit your investment exposure by not utilising the remaining $350,000.
An alternative way to allocate your $1.2million capacity would be to purchase two $600,000 properties or one $500,000 and another $700,000.
This could allow you to diversify your portfolio with two properties in different locations, but also maximising your asset base for creating long term wealth.
Assuming properties increase in value over time, the greater the asset base, the greater the overall return.
3. Understanding market cycles – they don’t all move as one
A major consideration when building a property portfolio is understanding the property cycle for each specific property market and how close that market is to a growth cycle.
For example, Brisbane has remained relatively stagnant over the last few years, whereas Sydney on the other hand has experienced strong price growth since 2012.
After doing research, it is clear to see how Sydney has outperformed Brisbane from 2011 – 2018, with 100% growth compared to Brisbane’s 24%.
Historically, when one market has performed, the other has been stagnant. This is largely due to migration flows and an exodus of people from Sydney to South East Queensland when Sydney’s property market becomes too expensive.
The increased migration then puts pressure on the South East Queensland market, and in turn leads to price growth in that market.
The last time this took place was in 2002 to 2011, where Brisbane clearly outperformed Sydney with growth of 143%, compared to Sydney’s 27%.
There is no crystal ball to allow you to perfectly time your investment in a specific market, however by understanding the key drivers for each growth cycle you can position your investment in a market most likely to experience growth in the coming years.
If done successfully, you will be able to create wealth quicker and accelerate the portfolio building process.
4. When you are going to buy property, focus on what we call owner occupier type properties
In Australia, the potential buying pool is generally made up of 30% investors and the remaining 70% as owner occupiers (homeowners who live in their property).
When an investor purchases a property, it’s vital that they appeal to the largest possible portion of the market. To do this, they need to be able to attract the local owner occupier buyers when selling.
These buyers are more likely to become emotionally attached and pay more.
Our advice to investors is that they should understand what property type and features the local owner occupier market desire.
For example, if a key driver is to be located near a school catchment, then the property type may need to be a townhouse or house to attract a family.
A high percentage of local owner occupiers will also result in less properties available for rent, leading to increased competition for rentals, which in turn should drive up rental returns.
5. Supply & Demand
In Australia, we have thousands of micro property markets within markets. These markets all have their own individual investment characteristics and drivers.
One of the key factors that can vary from suburb to suburb is zoning. One suburb may have an oversupply of a particular property type i.e. apartments, whereas a neighbouring suburb may have a reasonably tight supply of the same property type.
Recognising the supply and demand in the area where you plan to invest is another key piece of advice. Purchasing in an area with an oversupply of properties will impact the rental return you will receive, and likely impact the potential capital growth you generate in the future.
Areas with a large number of high-density apartments or brand-new homes sold to investors, are the types of locations you might want to avoid when investing.
The demand for rent and re-sale is unlikely to be as strong as a tightly held suburb with a high percentage of owner occupier properties.
High supply, limited demand locations usually lead to less favourable rent and capital growth results, whereas the opposite is typically true of high demand, low supply locations.
Summary
The advice given above is general in nature and we recommend you seek the services of a professional before taking action.
