How to build the perfect portfolio
Your portfolio depends on four things; income, expenses, wealth target and the time you have to reach it.
LIKE many things in life, the idea of a perfect portfolio is highly personal.
It depends 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.
What is a property portfolio?
A property portfolio is a collection of investment properties owned by an individual, a trust or a company.
Individual investors typically live in one of the properties they own and rent out the others.
In some cases, the rental income they earn on a property is greater than their loan repayments; in others, it is less.
When the rental income is greater than an investment property’s outgoings, the property is said to be positively-geared; when it is less, it is said to be negatively-geared.
Most people get into property investment with the aim of setting up an income stream that steadily flows into their bank account whether they turn up to work or not, and so positive gearing is typically preferable to negative gearing.
But, high competition among landlords means that it’s not always possible to earn enough rental income to keep in the black.
And current legislation allows investors to deduct losses made on an investment property against their taxable income, so negative gearing has some perks, too.
What does a balanced portfolio look like?
When it comes to property, most investors have a similar aim: build a portfolio that pays for itself each month, while consistently growing in value.
To achieve this, you need some properties that deliver high rental yields and some properties that promise high capital returns, as it’s rare to find properties that offer both.
The former can typically be found in regional working cities such as Geelong, Ballarat or Bendigo, tourist meccas like Cairns, or in any other areas that attract large numbers of people to live on a short-term basis – and can offer yields up to 7 per cent.
The latter can be found in aspirational suburbs with long-term, family appeal, and can offer capital growth of up to 5-10 per cent per annum.
Balance can also be achieved through pursuing a policy of diversification.
Buying properties in different states will reduce your exposure to location-specific downturns, and investing in both residential and commercial property will help you weather storms in either market.
How do I build a balanced portfolio? Each investor will need to chart a slightly different course to reach the promised land of positive cashflows and long-term capital growth.
According to Ben Kingsley, co-host of the Property Couch and founder of financial advisory firm Empower Wealth, the steps you should take to get there ultimately depend on four factors: income, expenses, wealth target, and the time you have to reach it.