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Here are 7 tips that you could consider to start building out your portfolio. If you are on top of all of them you are well on your way to achieving passive income through investing
1) Have a goal and a plan
Setting a clear passive income target and having a plan to reach there lays the foundation for building a portfolio. This determines the number of properties you need to buy and how fast you need to buy them to reach your target while factoring in your constraints such as borrowing capacity and access to capital to purchase properties.
2) Break your journey into 3 stages
a) Stage 1: Accumulation –This is usually the period where you focus on acquiring properties. Each acquisition should pave the path to the next one. These properties will form the foundation of your portfolio. The focus here is on capital growth without sacrificing rental yields (since lower yields will create borrowing capacity constraints).
b) Stage 2: Consolidation: This is where you are no longer acquiring properties but are looking to optimize each one of them to give you better returns. Improve cash flow on the properties by renovating them, adding extra dwellings (e.g. granny flats). You may also look to refinance your loans to reduce interest repayments to increase cash flow. This is also the stage where you could review your portfolio and sell off under performing assets and get into better markets with better opportunities.
c) Stage 3: Let the property values and rents grow exponentially through the magic of compounding. Once you have given enough time for the compounding effect to take place, it’s now time to focus on cash flow. You may either choose to pay off debt by selling a few properties or transition into high cash flow assets.
3) Plan out structures/look for different avenues
This is important especially when you are building out a big portfolio. Knowing when to buy in your own name or a separate entity such as a company or a trust structure is crucial in growing your portfolio. Exploring options as SMSF or trust structures may help you building out your portfolio when nearing your borrowing capacity ceiling. However, trust structures and SMSF’s are fairly complex structures and it’s best to consultant an accountant before venturing down this path.
4) Know how to read property markets
During the accumulation phase it’s important to purchase properties in markets that would rapidly increase in value over the next 2-3 years. This means that you should know which market to enter at any given moment to get the best returns on your investment. This comes to understanding each property market nationwide and knowing which stage of the growth cycle that market is at. Only purchase assets in markets which have strong short term growth potential with the fundamentals in place for long term growth.
5) Getting finance structures correct
Should you go P&I or Interest only?
Should you fix or go variable?
Should you go with a bank that gives you the best interest rate or the one that gives you access to more funds?
All of this would depend on your personal situation. It’s best to discuss this with an investment savvy mortgage broker who understands your long term goal and what you are trying to achieve.
6) Have patience
Along the journey you may face many obstacles – e.g. maintenance issues, issues with tenants, changes in laws which may make things difficult to you. If you can be patient and persist through all of these challenges you will get your reward of financial freedom in due time.
7) Have a good team
Having an investment savvy mortgage broker, an accountant specialising in the property space and an investment focused buyer’s agent would speed up your journey considerably allowing you to reach your goals faster. The team you work with will eventually determine how successful you are in your investment journey.
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