3 things to consider when building your property portfolio
Investing in property comes with different challenges to buying your first home.
But, thinking about your investment goals early on may help make it easier when it comes to deciding whether to buy a potential property.
People build their property portfolios in different ways. You may be actively searching for an investment property to purchase, or you might decide to buy a different house to live in while you rent out your previous home. Of course, everyone’s situation is different so be sure to chat to your finance specialist if you need some personalised advice.
Let’s look at three things you should consider when building an investment property portfolio.
1. Capital growth
You’ve probably heard the term ‘capital growth’ but what does it actually mean?
It’s basically referring to the increase in the value of an asset or investment – AKA your property – over time. Capital growth is usually influenced by supply and demand.
So, if the demand for your property is stable, then – in theory – your property’s value should increase over time.
So, why’s capital growth important when investing in property? Tapping into your capital growth is the most common way to expand your property portfolio. Investors may use the equity in their homes as a deposit for future investment properties. But this is generally only possible if the initial property’s value increases.
2. Cash flow
Capital growth is useful at increasing the value of – and expanding – your property portfolio’s value. But don’t forget it’s your cash flow that helps you service your property debt.
You may have heard of the terms negative gearing and positive gearing. But what do they have to do with cash flow?
A negatively geared property is usually when you invest in a property that has what’s called a low yield. So, your rental income may be less than what it costs you to service the property’s debt. These types of properties are generally found in larger cities and well-located areas.
While these types of properties could be good investments to help expand your property portfolio, you might need to consider the long-term situation. If your properties are negatively geared and the rental income is less than what it costs you to pay the loans, it may impact your cash flow to service future loans.
In comparison, a positively geared property is when your rental income is more than the cost of paying for the property. These types of properties are considered high yield and usually situated in the outer suburbs and regional locations. They may not be as ideally located as the inner-city properties, but since they earn more than it costs you to pay their loan, they help increase your cash flow. And this increased cash flow may help you build your property portfolio.
3. Value adding
When you’re investing in property, you generally aim to increase your property’s value. There are numerous tactics you could use to add value to your property. But let’s look at two of the most popular, and often easiest, ways to add value to your property portfolio.
Cosmetic upgrades
Firstly, you could add value to your property by undertaking a cosmetic renovation. A freshly renovated property usually increases in value as tenants are often willing to pay more for an updated house. So, a coat of paint, new carpet, upgraded bathroom, or even a new kitchen benchtop, could make you more money in the long run.
Divide and conquer
Secondly, if your property is on a larger block of land, you may consider subdividing or developing the land. You could subdivide the land and sell it to generate a chunk of money, which you could use to grow your property portfolio. Or you might build another house on the additional lot and rent it out for extra income.
No matter your property investment goals, be sure to do your research when you start building your property portfolio. If you’re considering investing in property but aren’t quite sure about all the financial ins and outs, contact your finance specialist to discuss your situation.