While we all have different goals when it comes to property investment, for those out there that want to continue to grow their portfolio there are a number of important considerations to take into account. Many homeowners unwittingly become investors when they look to upgrade their first home and decide to keep the original property. However, if you are looking to build a property portfolio quickly, you will need to consider many other factors.
The most common way investors continue to expand their property portfolios is by accessing the equity in their homes to use as a deposit on future investments. This is only possible if the initial property grows in value. Capital growth ultimately comes down to supply and demand. If a property has steady demand, then over time the value of that property will increase. We see this a lot with inner-city locations that are well-located and have plenty of amenities.
The first step to finding great locations to invest in is to look beyond your own backyard. Most new investors like to invest in an area they are familiar and comfortable with. However, this might not be the best way to grow your property portfolio.
While capital growth is what ultimately increases your property portfolio’s value and lets you expand your portfolio, it’s cash flow that will help you service the debt. If you invest in a property that has a low yield where the rental income is less than the cost to service the debt, then you have a negatively geared property. This type of property is typically found in larger cities and well-located areas.
While these properties make great investments if you want to expand your property portfolio, down the track a negatively geared property will weigh on your ability to service future loans. A positively geared property is one in which the rental income is greater than the cost of holding the property. These types of properties are found in outer suburbs and regional locations. While not as well-located, the higher yields help to boost your cash flow, making it easier to grow your portfolio.
Arguably the most powerful thing about property is that you have the ability to increase the value of your investment. If you were to invest in shares, for example, there is really nothing you can do to boost their value, leaving you at the mercy of the market. With property, there are a number of strategies you can use to add significant value to an asset. The most obvious way to do that is through a cosmetic renovation. A renovation adds value to a property, and also has the benefit of making it more appealing to tenants, which can boost rental yield.
Houses on larger blocks of land might also be candidates for subdivision or development. It’s possible to subdivide a portion of a property and sell off an unused area of land. You could even build a new home on that piece of land. The benefit of this strategy is that you can very quickly manufacture value and you don’t have to wait for either capital growth or rental income.
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