How to: Build the perfect property portfolio

Like many things in life, the idea of a perfect portfolio is highly personal. It depends largely on your goals, your personal and financial situation, and how much risk you can handle.

This means that what works well for others may not be the right strategy for you. For example, some people may have made a fortune by buying older properties that they have renovated and flipped. Others may have made money by buying new houses and holding over the long term.

There are literally dozens of ways to build a property investment portfolio, but there’s one strategy that trumps them all – balance.

Regardless of your situation, age or experience, balance is the one thing that can help you maximise your profit and minimise your risk. It’s the one thing you need to factor into your portfolio if you want to succeed as an investor.

So what does a balanced portfolio look like?

For some investors, a balanced portfolio includes owning properties in different states of Australia. It could be a collection of units and houses located in higher and lower-income areas, and containing both residential and commercial properties.

It could be a range of properties that are achieving solid capital growth and good rental income.

As an investor, this should be your ultimate goal: a property portfolio that pays for itself each month, while also growing in value.

Cash flow properties

These are properties that are earning you enough rental income to cover the mortgage interest you’re paying, at the very least. At most, they are making you a profit after you’ve taken the expenses into account.

These properties, also known as cash flow positive properties, tend to have a high gross yield of around 7%.

The types of properties that generally achieve good cash flow include:

Smaller (one or two-bed) units in the inner cities due to their generally lower price

Houses in regional areas and around the outer fringes of capital cities due to their generally lower price and potential higher rents

Commercial properties due to their potential high rental yield, low maintenance cost and price.

Capital growth properties

These are properties that grow in value over time. Ideally, you want properties with long-term historical growth of at least 8% per annum. This would mean you could potentially double your money within seven to eight years.

Properties that have achieved strong long-term growth are generally located in inner-city areas and high population growth areas. These areas tend to be more affluent and are not affected as much by economic cycles and interest rate changes. Properties that have achieved strong long-term growth are generally located in inner-city areas.

Therefore you can often build equity faster and this helps you to invest further. However, due to their higher price points, it’s likely to cost you to hold them. This means the rental income you generate is not enough to cover the mortgage repayments.

Also known as negative gearing, this strategy essentially means you’re making a loss in the hope that the property will grow in value in order for you to recoup your losses.

• The types of properties that generally achieve good capital growth include:
• Houses near city centres due to high demand and the land component
• Units in premium suburbs due to changing demographic demand
• Houses and units near the water due to the desirable lifestyle component

What should be in your portfolio?

As mentioned, this depends on where you are at in your investment journey, what your personal and financial situations are, and the goals you want to achieve and when.

If you’re a beginner investor and on an average income, you may want to buy cash flow positive or neutral properties first to help you ease into the game much easier.

Older houses in the outer fringes of capital cities generally achieve higher rental yields by virtue of their lower price points. You also have the added benefit of being able to do cosmetic renovations to try an force growth on your property. This means you get to enjoy both income and capital growth.

Ideally, you want a number of these properties in your portfolio to start with. You can then look at adding growth properties to balance them out. These can be your fourth or fifth property purchases.

Some investors buy each type alternately each year. So, for example, in Year 1, they buy cash flow property. In Year 2, they buy capital growth or negatively geared property. In Year 3, they go back to cash flow. In Year 4, they’re back to capital growth, and so on.

Doing it this way could help you even out your cash flow, and if you crunch the numbers right and buy well, you could end up with a portfolio that’s costing you practically zero as the cash flow positive properties cover the shortfall of your negatively geared assets.

The type of property is less relevant than its cash flow and capital growth potential, although some investors don’t like investing in units and just buy houses, while others have a mix of both.

Ultimately, the perfect portfolio is not static but evolves as time of life, objectives and circumstances change. Demographic and market changes also have a profound impact on any portfolio.

Building and maintaining a perfect portfolio requires you to be vigilant and constantly correct your course along the way. Failure to adapt and evolve over time will lead to, at best, an underperforming portfolio and, at worst, serious financial difficulty.