You’ve probably read or heard some horror stories recently about the property market crashing across Australia. The media loves a bit of drama and negativity, but with a little research and planning, this could be the perfect time to start building your property portfolio and take advantage of the price reductions in some areas. The key is ensuring you buy a true bargain and avoid the lemons.
“It’s entirely possible to become financially independent in less than 10 years” writes Debra Beck-Mewing of Crave Property Advisory, “with just a slight adjustment to our approach our ‘work’ years could just be considered as the foundation for creating lifetime income.”
Sounds like a dream? It’s a reality that many Australians are taking advantage of, at any stage of life. While the golden rule for buying property is ‘the sooner, the better’, an individually tailored approach to property investment can reap benefits at any age.
Crave Property Advisory’s proven Modular Investing System advocates long term investment in a diverse property portfolio rather than the ‘buy, renovate and flip’ strategy more often promoted on TV shows. The system relies on three fundamental principles – flexibility, balance and resilience to facilitate a personalised investment strategy.
The ultimate goal is to create a portfolio of unencumbered (no loans) properties that will provide an ongoing income stream to the investor. This is achieved through carefully planned, gradual investment in both capital growth and high yield properties. The number of properties you buy and the time you take building your portfolio will depend on your personal circumstances.
Let’s look at an example.
Daniel and Sarah are married and in their 40s, with two teenagers. They own their own home worth $780,000, and owe $200,000 on their mortgage. Their combined income is $150,000 per year.
Already in their 40s, Daniel and Sarah are keen to make a speedy start towards building a property portfolio, so their investment plan will need to ramp up quickly to achieve a $2,000 income for their retirement. But they are in a strong position having equity in their home and established careers. The equity in their home may be enough to provide deposits for up to five investment properties over a three to five year period.
The first step is to set their investment criteria. The focus shouldn’t be about personal taste or favoured areas, but about finding affordable properties in suburbs with a strong rental yield. As first time investors, Daniel and Sarah should look for investment opportunities around the $250,000-$350,000 mark. To help de-risk the portfolio, they should choose one property in a higher capital growth area (say 7%) with a yield of at least 5.5%, and one in a lower but stable growth rate area (say 6%) and higher yield (at least 6%). This strengthens the portfolio overall as higher income against an increasing asset base reduces the loan/valuation ratio which aids future borrowing.
For optimum performance, the couple should buy the first one or two properties in the first one to two years, and keep building over the next three. With yields of over 5.5-6%, and interest rates around 4%, each property will start to yield some surplus cash, which should be held in an offset account against the couple’s home. Daniel and Sarah will utilise ‘interest only’ loans where possible and will work with an experienced mortgage broker to ensure their loans are structured for their needs.
Where possible, the properties selected should have the opportunity to add value through renovation, adding an extra dwelling such as a granny flat, or potential for future development.
After the first two investment properties are up and running, the couple should identify another two, on the same principles. Finally, a fifth property should be selected with higher capital growth potential. Once the interest free periods expire, the rental income (growing with capital value) should be used to repay the loans.
Within 10 years Daniel and Sarah could plan to pay off their home loan, while within 20 years their portfolio should generate an income of $2,000 per week. If the couple wants access to capital in this time, they can select a high growth property for divestment.