10 DecBuilding a Property Portfolio – minimising risk

 

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Building a successful property portfolio is not a simple process. The process is ongoing, requires solid planning and time critical decision making. Purchasing numerous properties without proper planning is unlikely to achieve above average returns in the long term – which is one of the only reasons you’d want to own multiple properties in the first place!

 

Investors should aspire to create a property portfolio that is appropriate for your individual level of risk tolerance and achieves your financial goals and objectives. Through doing this, the appropriate portfolio should contain properties that reduce volatility through diversification and work to maximise the tax advantages available (through specific financing arrangements and differing ownership structures).

If you seek to achieve sustainable and long term returns from property then you should take into account the following tips – they are absolute crucial to consider when building a portfolio.

Time Until Retirement

The stage of life that you’ve reached and your financial situation will determine the best type of portfolio strategy for you. Investors at the beginning of their career should scale down their exposure to risk until they have the capacity to take on greater debts. This is done to protect their already existing capital and wealth.

Similarly if you’re thinking about retirement in the next few years and are in a comfortable financial situation (relative to your objectives) then you should also scale down exposure to risk. Again, this is to protect built up and existing capital and wealth.

If you fall in-between this spectrum you should look to actively build your wealth by seeking high-risk investments in return for higher returns (hopefully).

 

Location

Diversifying through location is a form of risk management undertaken by investors. When adopting this approach it is vital that land value is properly assessed. Land value is driven by scarcity, proximity to infrastructure or areas of attraction and convenience to transport options. Seeking appropriate combinations of these factors will enable investors to find good land value.

Some suburbs may be potential growth havens in the future – and therefore seem very attractive. This type of speculation can however be costly – investment decision such as this should only be undertaken if they are based on significant and justifiable reasons in conjunction with advice from your property advisor.

 

Property Types

The Australian dream to own (a minimum) three bedroom home with an open adaptable living area is very much alive and is very desirable for the majority of tenants and future buyers. When considering property investment it is important to focus on properties that will attract high proportions of the population the majority of the time.

Newly built houses are in some ways more advantageous for investors when compared with older houses. They can be more easily designed and landscaped to an appropriate standard for a rental property, and they receive the maximum depreciation allowance from the ATO.

Older properties can still however be very valuable investments in the right circumstances. Certain housing styles (such as Art Deco) are in limited supply however may go through periods of time where they become quite trendy amongst buyers and therefore more valuable.

Caution should be taken if investing in apartments – in certain suburbs they may present unique yield and growth opportunities however quite a lot of the time they can be quite risky. Often there is a lack of scarcity for apartments and therefore they can be of lower inherent value. There is also the risk that a newer and more appealing building will be established nearby.

 

Cash Flow

It has been suggested that cash flows can be used to diversify against property risk. This is done by including a mix or positive or neutral cash flow properties alongside negatively geared properties.

There has been quite a lot of discussion recently about negative gearing in Australia. Many don’t actually understand what the concept entails. Negative Gearing is when the interest repayments on a property are greater than the returns in the same period. Of course this means investors are making a loss, however there are taxation advantages. There is also the strong belief that the property value will increase over time to an amount that at the time of sale, offsets all the losses incurred through the interest rate losses.

Combining positively or neutrally geared and negatively geared investments provides an additional diversification of your rental yield.

A positive or neutrally geared property will assist with loan repayments, and reduce the sole reliance on capital growth to produce returns in the long run (negative gearing). This approach can be somewhat problematic, because seeking high rental yield often occurs at the expense of long term capital growth. Thus investments in poor quality assets often occurs, assets that won’t deliver appropriate capital growth in the long term required to achieve your financial objectives.

If you are really in need of additional cash flow through high rental yield, your investment should be made within the bounds of good value and sound diversification.

The best approach is to seek properties that have good overall value and which are well diversified through building type and location.


Renovating and Developing

As previously mentioned older houses can at times offer unique investment opportunities. This is due to fluctuating popularity, but also due to the opportunities they can offer for renovation and development. Development or renovation is often quite common for investors however can be a very risky process and needs to be properly managed.

It can be a very effective short-term strategy to deliver increased capital growth and rental yield.
Low cost options such as renovating a key room, adding a storage space and undertaking a cosmetic renovation are all options that can be completed quite quickly and add reasonable amounts of value to properties.

 

In conclusion, a wide and diverse property market analysis should be undertaken when considering property types. Consideration of the current market, alongside with forecasts is very important and should be incorporated into any decision.

The process of building a portfolio in property is not a simple task. Articles like this only touch the tip of the iceberg in regards to variables to consider when choosing appropriate properties to build a portfolio. If you’re thinking that perhaps property investment may be for you but don’t know where to start Nieuvision is here to help you. For many years now we have helped clients who’ve found the property market scary initially, and built their wealth and confidence up to a level they never could have imagined. Remember, you don’t have to take this big step all by yourself! Nieuvision is here to guide you on your journey. Contact us today!

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