Finding the perfect investment property portfolio
A GOOD PROPERTY PORTFOLIO SHOULD INCLUDE A MIX OF PROPERTY TYPES AND AREAS. NO MATTER WHERE YOU ARE STARTING OR YOUR SITUATION, AGE OR EXPERIENCE, BALANCE IS IMPORTANT TO HELP YOU MAXIMISE YOUR PROFIT AND MINIMISE YOUR RISK.
What does a balanced portfolio look like?
For some investors, this could include owning properties in different geographic areas and in south-east Queensland alone this could mean Brisbane, Toowoomba and the Sunshine Coast.
A balanced portfolio can also be a mix of new house and land, units or townhouses, existing houses or off-the-plan units or townhouses. Units and townhouses may meet inner city requirements where house and land could be uneconomical. In some markets house and land may deliver the best return. The type of property is often less relevant than its appeal to tenants, its cash flow or its capital growth potential.
Capital growth versus rental return
Capital growth properties are those that grow in value over time. Ideally, you want properties with long-term historical growth of around eight per cent per annum on average, meaning you could potentially double your money within seven to 10 years. Properties that have achieved strong long-term growth are often located in inner-city areas and high population growth areas with strong infrastructure growth.
Cash flow properties or positive geared properties are those that are earning you enough rental income to cover the mortgage. These properties tend to have a high gross yield of around seven per cent. While you’re making a loss in the short term the rental income from the property will increase in the future when the property turns positively geared.
As an investor your ultimate goal should be – a property portfolio that pays for itself each month, while also growing in value.
Buying new versus old
After years of experience, and making enough mistakes myself, the most important thing I have learned is to buy new not old. There are quite a few reasons for making this decision – one of the most important is the huge difference the tax benefits can make. The maintenance costs are close to non-existent, as the builder is responsible for correcting any faults for six years. Newer properties are also generally well presented with an appealing design and high quality tenant-ready features.
Comparing expenses and returns
It’s always interesting to compare houses versus units and townhouses. Houses seemingly have less cost compared to units or townhouses due to the latter properties having Body Corporate fees, however there is a maintenance component not factored into houses that is allowed for and covered in Body Corporate expenses. Council rates are also calculated differently for the different property types. All have their benefits and we generally find that over time, costs and returns are often equal.
Doing the right research
Research is key in identifying the best property for your portfolio. Property types should match demographics and the area e.g. units/townhouses may not be required in smaller regional markets, where house and land on the other hand may have strong demand. The majority of investors don’t do enough research, or worse still, get incorrect information from the huge amount of data available online. It is vital to know what is happening with infrastructure spending, demographics, employment, economic growth and supply and demand, to name just a few.
Five reasons why property is smart investment in 2017
1. Safe as houses
According to research by AMP, Australian property has increased in value at a rate comparable to the share market since 1926 – an average of 11.4 per cent per annum, despite a succession of wars, disasters, recessions and crisis.
2. Tax breaks
There are huge advantages to having a tenant and the tax man pay off your investments for you. In some case, even the most conservative property can turn into a cash flow positive wonder after tax breaks. Let’s look at a few:
Depreciation – one of the most underrated and overlooked tax benefits is depreciation, which works best when you build or buy brand new. On a $500,000 property, depreciation can vary between a $10,000 and $25,000 per annum tax deduction.
Claimable expenses – using the right account means there a number of things that could be claimed that are often overlooked, including stationery, travel and computers.
Negative gearing – if your investment initially makes a loss instead of a profit, the loss is considered tax deductible. However, note that any tax deductions here are a bonus and should not be the purpose of your investment.
Superannuation – self-managed super funds (SMSF) are becoming popular, giving people more control over their investment choices including purchasing property.
3. Secure growing income in retirement
Moving towards retirement, the biggest positive about investment property is that it continues to grow; therefore your income in retirement will grow. And rents also increase leading to long-term increasing income in retirement.
4. You can use leverage
Using other people’s money to make money is one of the biggest benefits of investing in property. Banks will lend up to 90 per cent of the value of a property meaning a $50,000 investment can change into a $500,000 investment. And the great part is you will earn, in the above example, 11.4 per cent on the whole amount.
e.g $50,000 x 11.4% = $5700
$500,000 x 11.4% = $57000
5. Property is flexible
Given the flexibility of property, no matter what your financial aims, you should be able to find an investment strategy to suit your needs. For example, if you have time, it’s the best way to build a retirement nest egg given it is historically proven to deliver capital growth.