Quality Vs. Quantity In Building A Portfolio
By Rich Harvey
Here’s the bottom line: You’ll need more than one investment property to create wealth and retire comfortably.
In today’s fast moving world with instant communications, SMS, fast food and 2 minute noodles, many budding property investors are being lured with the promise of “get rich quick” schemes that promise investors they can make “instant equity” and become a millionaire in less than 5 years. It seems that Generation ‘Y’s (Millennials) are particularly at risk as they are the instant gratification generation.
Gen Y’s are typically more tech savvy and expect everything to be delivered faster. Gen X’s and baby boomers are equally at risk as they may think they have to “rush” their investments to catch up. While pizza delivery can now be tracked to within 60 seconds, property investors of all generations need to appreciate that capital growth can take decades over the course of a property cycle.
The psychology of some investors is similar to a poker machine – put in a little bit of money, pull the lever and hope for the best. Smart investors know the odds of poker machines are stacked against the user. Expecting any investment strategy to quickly turn you into a millionaire within a year is simply unrealistic.
If you have a goal of $150k passive income you’re going to need at least $3m in net assets ($3m divide 5% average yield = $3m). So you could buy one investment property at $3m but it is highly unlikely to rent at 5% return. Or you could buy 6 x $500k properties to achieve the same goal, which is a much safer and effective way.
So how can you set about building a solid property portfolio of quality properties?
There’s a number of simple steps you can take to get on your way sooner.
- Assess your current financial situation and set some realistic goals
- Speak to a mortgage broker and get an estimate of your borrowing capacity
- Pick a property strategy that works for your situation
- Research and decide where to buy
- Search for good quality properties and select one.
While I have over-simplified some the above steps, note that property selection comes at the end of the process. There’s no point jumping on the internet searching property portals if you don’t have a clear strategy and refined search criteria.
In deciding which property investment strategy to pursue, consider the end point – are you going to hold the property long term, or is it a trade-able property to sell in the short to medium term?
I have unfortunately seen some naïve property investors lured by property spruikers to attend a property seminar and then buy the first property they were offered without doing adequate due diligence.
One strategy home buyers can use is the “trade-up strategy”. This simply means getting onto the first rung of the property ladder – say a one bed unit. Over time you pay down the mortgage and build up equity to trade up to a two bed unit in a better suburb. Several years later you may be able to afford a townhouse or duplex…then perhaps a house. I recommend using some of your home equity as a deposit for leveraging into other investment properties. If you wait to pay off the home loan first, before committing to property investing, you might miss out on three decades of growth.
Rich’s Tips to Build a Sustainable Portfolio:
- Set clear objectives and stay accountable.
- Diversify into different markets/ states/ suburbs to take advantage of changing growth cycles/ infrastructure/ changing demographic.
- Monitor performance annually…but be patient for growth – don’t expect instant capital growth. You need to hold the asset for at least 10 years to really see the benefits of capital growth compounding.
- Get rid of dud properties in mining areas or lackluster suburbs with no long term potential.
- Focus on buying quality properties that you don’t need to sell.
- Refinance, draw equity and reinvest – recycle your equity.
- Don’t try and buy too many too fast – get advice on what and where to buy.
- Manage your debt levels carefully.
At the end of the day it’s not the number of properties that you own, but the overall value and quality of properties in their portfolio that counts.
Rich Harvey is founder and Managing Director of propertybuyer.com.au, Australia’s most awarded Buyers’ Advocates. Propertybuyer helps property investors and home buyers search and negotiate the right property at the right price, every time. Visit propertybuyer.com.au or call 1300 655 615.