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How to Build a Property Portfolio

How to Build a Property Portfolio

Nook Admin – January 6, 2020

Overview

As with most things in life, the perfect property portfolio is personal thing. It will depend on your financial goals, your financial circumstances, and how much risk you are willing to take.

So what might work for someone else may not work for you. As an example, someone may have made money buying older properties and renovating before selling at a premium. Other people may have made money buying new properties and holding on to them for a long time.

There are many ways to build a property portfolio, but there’s one strategy that beats them all: balance.

Regardless of your personal or financial situation, age or experience with property, balance in the property portfolio is the one thing that can help you maximise your profit and minimise your risk. You need to factor this into your property portfolio if you want to succeed as a property investor.

What is a Property Portfolio?

A property portfolio is a collection of investment properties you own. Most property investors live in one of their properties and lease out the other properties.

Typically, the rental income they earn on a property is greater than their home loan repayments. When the rental income is greater than an investment property’s outgoing expenses, the property is said to be positively-geared; when it is less, it is said to be negatively geared.

Most investors build a property portfolio with the goal of establishing an income stream that adds to their bank balance without them having to do too much work on a regular basis. So a positively geared property portfolio is typically preferable to a negatively geared one.

What Does a Balanced Portfolio Look Like?

Most property investors have a similar goal: build a property portfolio that pays for itself each month and preferably grows in value each year. To do this, an investor needs some properties that produce high rental yields and some properties that deliver high capital returns. It is difficult to find properties that offer both rental yields and solid capital returns.

Portfolio balance can also be achieved by following a policy of diversification. In other words, buying properties in different locations will reduce your exposure to location-specific downturns, and investing in residential and commercial property will help ride out market corrections in either market.

How Do I Build a Balanced Property Portfolio?

Each investor will need to take a slightly different path to reach the portfolio goal of positive cash-flows and long-term capital growth. And it will take time, as property is a long-term investment strategy.

The steps to build a property portfolio really depend on four factors: your income, your expenses, your wealth target, and the time you have to reach it.

1. Start With Your Goal and Work Backwards

You have to start with a goal so you have something to aim for. This will make sure that your property strategy is focused and will give you something to refer to when you need to make hard decisions. This goal could be a passive income of P2,000 a week or P100,000 a month by the time you retire.

2. Focus on Income First

There is a wide variety of properties and locations all at different price points. Property investors need enough savings to pay a deposit and enough income to pay the monthly repayments on their home loan.

This means that those attempting to build a property portfolio either need to wait until they earn enough money to cover the rental losses on low-yielding, high capital-growth properties. Or, the other option is to only buy highyielding, low-capital growth properties initially so that they produce the income needed to cover expenses.

What Properties Should Make Up Your Portfolio?

Again, this will depend on your circumstances and the goals you want to achieve with your portfolio. Plus the timeline for when you want to achieve these goals must be considered.

If you are just starting out and on an average salary, you will probably want to buy cash flow-positive or neutral properties first to get started. So one thing to note if this is your goal is that older properties on the edges of major cities can generally achieve higher rental returns due to their lower price points.