How a balanced portfolio approach will help you succeed

Posted 3 Feb '16

by Peter Ambrose on
Article appears under: Investment Strategy,

The Planning Stage

Any investment strategy should always start with identifying what type of investor you want to be, and how residential property will fit into your long term goals.

First up, before you do anything else you must clearly define what your long term property goals are. You may want to supplement your retirement income, use property to pay down your own mortgage, you might be more aggressive and want to replace your salary so you can leave your job or you might even be looking to work in property full time and investing is your first step.

Of course, all goals are possible, but you need to make sure they are SMART, ie. Specific, Measurable, Attainable, Relevant and Time-Bound. Here are some questions you should ask yourself:

  • How much money do I need to generate from property?
  • How much equity do I need to build?
  • What time span do I have to achieve this?

Once you have written down the answers to these question down, you are then able to start to work backwards and plan your annual goals. This can then be broken down to shorter term monthly and weekly action steps and provide a road-map for you to follow.

What is a Balanced Portfolio?

Every investment strategy needs to be designed around your goals and time lines. The goal is always around creating the right mix of:

  • Cashflow
  • Capital Growth

This can be done as simply as buying 1 or 2 “buy & holds” per year, or you may wish to accelerate that growth by learning and applying new strategies.

A balanced portfolio will always support your long term goals with the right mix of property related activities.

How do you build a Balanced Portfolio

The common strategy is to look for a property that will provide you a good yield and in a few months lets you pull out some of the equity and use that as a deposit for the next property purchase.

Sounds simple, right?

Well, as you start understanding the market and where we are in the property cycle you soon start to realise that you are not likely to get that in the middle of the city and competition is fierce for any good looking properties in most of the suburbs.

It can become costly and quite time consuming queuing up at open homes and doing research on every property and submitting tenders that are unsuccessful. Certainly, using a property finding company is helpful to find some deals that meet your criteria, but you still need to do your own due diligence and be clear on how each property fits into your overall strategy.

Another avenue to finding properties is via private vendors. They are the easiest to deal with as there is less competition and you can negotiate price and terms to suit both parties. Don’t be afraid to ask around work or friends if they know of anyone looking to sell a property. Timing is everything and you never know, they may say….”actually I do!”

My property goals are about owning a core number of properties that I have built up over a number of years that I want to keep for life and then pass onto family. These properties are the ones that are in good areas, are well maintained and provide a 100% occupancy. These type of properties will be in good capital growth areas and provide an excellent rental and return.

After you manage to get a deal or two and your portfolio is starting to look good, you are likely to start to think about accelerating your property investing without taking on undue risk.

Strategies to support your core portfolio

To support my buy and hold properties, pay down debt and produce extra income to meet the bank’s servicing requirements as my portfolio grows there are other strategies that balance out my investing. These include trading, developing, lease options, joint ventures or even leveraging the expertise I have acquired to assist others in investing for a fee.

Trading and developing: This could just be a simple renovation or a sub-divide with a build option. These trades are taxable, but if you have your structures and rules identified you can still get some good lump sums of money to use to help fund a deposit for another property or to pay down debt on your “keepers”, thereby increasing the cash flow and keeping the banks happy.

Joint Ventures: A variation on trading when you are short of cash or don’t have the necessary expertise is a Joint Venture or "JV". As long as all parties bring a unique attribute to the deal and provide clear boundaries, then this can provide another means to make a deal work that otherwise would not have happened. It is always important to have clearly defined exit strategies in place for each property before you commit to a Joint Venture.

I recommend Joint Ventures be limited to trades or Lease Options as people tend to change their lifestyle needs over time and having long term “Buy & Hold” Joint Ventures can become problematic.

Lease Options (Rent to own): These can provide a good income and if done correctly, they are great win-win for first home buyers and also the investor. Lease options are a cashflow strategy, so don’t plan on any capital growth with these in your portfolio.

As you can see, property investing can be extremely versatile and the more you learn about different strategies and more properties you look at, the more opportunities seem to unfold before you.

I encourage my students to review their portfolios every year and continue to maximise their existing and new purchases, to make sure they maintain their road to success via a balanced portfolio.

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