Investing in property is a great way to secure your financial freedom. Whether you want to use your profits to pay off your family home, ensure an affluent retirement, or to fund that yacht you’ve had your eye on, building a multiple-property investment portfolio could be your ticket to an independent future.
But before you jump on realestate.com.au with guns blazing, there are a few things you should know. Here are six tips to build a strong investment portfolio that you can count on:
Understand negative vs positive gearing
Negative gearing has been in the news lately, but it’s not as complicated as politicians would have you believe. Negative gearing simply means that the costs of owning a given investment property are greater than the rent you collect. Positive gearing is the opposite – the rent you collect is greater than the costs of owning the property. So which way to go? Well, it depends on your investment strategy.
Develop an investment strategy
Negatively geared properties tend to have better capital growth potential, whereas a positively geared property will start making modest profits immediately but may be worth less in the long run. Negative gearing is best if you plan to hold your investment property for several years while you wait for its value to increase. Positive gearing is best for creating a short-term revenue stream that you can use to help fund the purchase of your next property. Negative gearing may also work in the short term if you plan to renovate your property to increase its market value before selling.
Get your financials right
It’s the least sexy part of property investment, but how you structure your investments can make or break your profits. For example, you may choose to purchase investment properties through your self-managed super fund for a significant tax discount, or you may prefer to set up a trust. Your best bet is to speak with an accountant who specialises in property investment – they’ll be able to structure your investments to suit your personal financial situation.
Think long term
Unless you’re planning to renovate and ‘flip’ your investment property, it pays to take a long-term view. To gain the full capital growth benefits of your property, you’ll need to hold onto it for at least one full market cycle (about seven years), but preferably longer. Otherwise, if the capital growth doesn’t cover the loan, transaction and maintenance costs of owning the property, you’ll end up behind.
Reinvest your profits
The fastest way to build a multiple-property portfolio is to reinvest your profits. For example, use your profits from a positively geared property to save for the deposit for you next property, or use your capital gains from selling a negatively geared property to fund the purchase of two or three additional properties.
Diversify your portfolio
While real estate tends to be a very safe investment, there are no guarantees and markets can fluctuate. Owning properties in different metropolitan and regional areas will help to protect you from any localised market pressures – for example, the closure of a major employer in a regional area such as a mine or hospital can put downward pressure on local property values. Also aim for a balanced mix of positively and negatively geared properties to best strength your portfolio.
To build a property investment portfolio that will set you up for the future, you need to choose the right financial structure for your personal situation, take a long-term view to select a balanced mix of positively and negatively geared properties, reinvest your profits to purchase your next investment property, and diversity your portfolio to ensure sustainable performance over the long term.