Embarking on the journey of building a property portfolio as a beginner can be both exciting and daunting. But knowing where to start is often the most significant challenge for novice investors.
Before delving into the specifics, take a moment to commend yourself for adopting the mindset to embark on this transformative journey.
This guide provides a step-by-step approach, outlining eight essential steps to help beginners kickstart their property investment journey.
How to Build a Property Portfolio for Beginners: Eight Essential Steps
1. Develop a Strategy
As you embark on the journey of property investment as a beginner, take the time to delve into the motivations behind building a property portfolio. Understand the broader context of your financial aspirations and articulate a strategy that is intricately tailored to your wealth-building goals. This involves a comprehensive examination of your investment objectives, encompassing both short-term and long-term financial targets.
Define Clear Objectives: Outline specific outcomes you aim to achieve through property investment. Whether it's rental income, long-term capital growth, or a combination, delineate clear goals for your investment journey.
Assess Risk Tolerance: Acknowledge your comfort level with uncertainty in investment endeavours. Consider factors like market volatility, economic fluctuations, and potential challenges. Align your strategy with your risk appetite for a balanced and well-calibrated approach.
Establish Investment Timeline: Determine if your goals lean towards short-term gains or long-term wealth accumulation. Let your preferred timeline guide decisions on property selection, financing strategies, and exit plans.
In essence, as a beginner, building a property portfolio begins with a deep understanding of your motivations, objectives, risk appetite, and timeline preferences. Crafting a strategy that reflects these considerations forms the cornerstone of a purposeful and successful foray into property investment.
2. Engage Professionals
Building a successful portfolio requires expert guidance. Surround yourself with a professional team, including property managers, accountants, buyers' agents, and mortgage brokers. Their expertise will prove invaluable in making informed investment decisions.
However, not all professionals are created equal. It's crucial to collaborate with professionals who have achieved the outcomes you aspire to. For instance, if your goal is to build a portfolio of six or more investment properties, ensure that the Buyer's Agent you choose has successfully accomplished this feat. Capitalise on the experiences of those who have gone before you, learn from their mistakes and successes. This approach will propel you towards success and significantly minimise your risk.
Avoid the common pitfall that ensnares many novice property investors—relying on advice from family and friends who do not hold a substantial property portfolio. The traditional tale of taking advice from uncles at family BBQs resonates across Australia. This approach can be a guaranteed path to failure!
3. Undertake Research
This step is arguably the most crucial. The challenge lies in knowing what to research and how to interpret the data, as opinions on the Australian property market vary widely—some optimistic, many pessimistic. It's important to factor in a combination of quantitative and qualitative data, complemented by on-the-ground research, when conducting your property investment analysis.
Immerse yourself in knowledge by reading books, listening to podcasts, and obtaining data to support your investment decisions. For beginners, a solid foundation of information is crucial for navigating the intricacies of property investment.
If you find yourself lacking the time for in-depth research, contemplate outsourcing this step to a professional for a more efficient and effective approach.
4. Calculate your Cash Flows
Perform a thorough "stress test" of your cash flows within the property portfolio. Plan for potential challenges and ensure your financial strategy is resilient. This step involves detailed budgeting and financial planning.
Keep in mind that costs will fluctuate each year, whether anticipated or unforeseen. Take for example, from the beginning of the interest rate hike in May 2022 until November 2023, the mortgage repayments for an average $500,000 mortgage surged by $1,200 per month (a 52% increase).
Here is a list of costs to consider budgeting for when holding an investment property:
Mortgage repayments
Council and water rates
Body Corporate fees (if applicable)
Landlord and building insurnace
Land Tax
Property management fees
Repairs and maintenance (a good rule of thumb is 1% of the purchase price).
5. Get your Finances Sorted
Recognise the integral role finance plays in the realm of property investment.
Obtain Pre-Approvals and Understand Borrowing Capacity: Obtain pre-approvals to grasp your borrowing capacity. This is where an investment savvy mortgage broker can help.
Set a Diligent Budget: Ensure a comprehensive grasp of both initial property acquisition costs and ongoing expenses. Align your budget meticulously with your financial goals and risk tolerance. Always remember, maintaining sufficient cash reserves is crucial in property investing. The ability to support the property through challenging times reduces the risk of selling at a loss.
Plan for the Long Term: Consider potential impacts of interest rate changes, market trends, and economic fluctuations. Adopt a forward-thinking perspective and incorporate contingencies into your financial plan. Fortify your ability to navigate uncertainties for sustained success in property investment.
However, the crucial step lies in ensuring you have the necessary upfront costs, which will encompass:
Deposit: This amount can range from as little as 5% to up to 20% of the purchase price. For instance, a 20% deposit for a property priced at $500,000 would amount to $100,000.
Stamp Duty: This will vary depending on the state and can be as high as 6% of the purchase price.
Lenders Mortgage Insurance: This will only be paid if you have less than a 20% deposit (unless you qualify for an exemption).
Conveyancer and Legal Fees: The key is to look beyond the price tag and seek professionals who have consistently earned praise from satisfied clients.
6. Diversify your Portfolio
Acknowledge the critical role that location plays in the realm of property investment, constituting a substantial 80% of the overall impact on investment outcomes. Understanding the significance of location is fundamental for beginners venturing into the property market.
Risk Mitigation Tool: Recognise the importance of diversification as a risk mitigation tool. Explore properties beyond your local area to broaden investment horizons and reduce the impact of localised market fluctuations. Adopt the principle of Not Putting All Your Eggs in One Basket.
Tap into Different Growth Cycles: Diversify your property portfolio geographically to tap into unique growth potential and market dynamics of different states and regions. This will hedge against risks associated with a singular market and enhance the likelihood of achieving favourable returns.
Let's consider a real-life example. For the 12 month period up to November 2023, prices in Hobart declined by 2.92% while Adelaide increased by 9.74%. That's a 12.66% difference. For example, at the beginning of the 12 month period you held a property worth $500,000. If that property was in Hobart, it would now be worth $485,400, but in Adelaide it would be $548,700. This equates to a $63,300 difference!
7. Treat it like a business
Treat property investment as a business, not a passive venture. Adopt a strategic and pragmatic approach to every aspect of your investment journey.
Clear Objectives and Metrics: View your property portfolio as a business entity with clear objectives and performance metrics. Always keep the end goal in mind.
Thorough Financial Analysis and Planning: Evaluate risk and return ratios to inform decisions aligned with long-term wealth-building objectives. Thoughtfully strategise your property investment journey by setting realistic goals and implementing strategies to foster consistent portfolio growth.
Proactively Address Challenges: Proactively address challenges to ensure long-term viability. This can be acheived by developing and maintaining an efficient operational framework for managing your property portfolio. Avoid burying your head in the sand and hoping the problem will resolve itself.
Focus on Long-Term Profitability: Prioritise long-term profitability over impulsive decisions by embracing strategies that withstand market fluctuations and economic uncertainties.
Build and Nurture the Right Team: Just like any successful business, the key to success in property investment lies in having the right team in place. Create a team around you that includes the best buyer's agent, mortgage broker, property manager, accountant, conveyancer, and building and pest inspector.
8. Don’t get Emotional
As beginners embark on their journey into property investment, a crucial lesson is to adeptly separate personal preferences from the decision-making process. This requires cultivating an objective mindset, wherein each potential investment is rigorously evaluated based on its merit for financial success rather than personal inclinations.
Avoid the mindset of thinking, "It's not a good investment because I wouldn't want to live there."
Separate Personal Preferences: Adeptly separate personal preferences from decision-making. Cultivate an objective mindset for evaluating investments based on financial merit. In other words, assess properties based on quantitative factors like market demand, rental yields, and economic conditions.
Evaluate properties objectively: Acknowledge that an ideal home may not align with sound investment criteria. Examine potential properties with a focus on potential returns, market performance, and financial viability.
Buying real estate is not only the best way, the quickest way, the safest way, but the only way to become wealthy."
- Marshall Field
By following these eight essential steps, beginners looking to build a property portfolio can lay a strong foundation for their property investment journey. Remember, building wealth through property is a learning process, and each step brings valuable experience and knowledge.
If you would like to know more about how we can help you build a property portfolio give us a call on 0423 344 286 or email us at hello@mindsetproperty.com.au, or simply connect with our Director Peter Theodorou.
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