What is a Property Portfolio?
A property portfolio is a compilation of all properties owned and investments made. However, the portfolio can be a compilation of the best-invested properties. Property owned includes the land, the building, and both qualities. The more valuable the lot of lands and the better the architectural and structural condition of the building, the better for the property portfolio. It is normal for individual investors to live in one of their investment properties and rent out the property to tenants.
Real estate investors use property portfolios to initiate and accumulate a source of income. A positively geared investment is an income stream with extra cashflow that can be invested into current or future loans. But there are instances of negative gearing which is lost income that can be taken advantage of to have tax benefits and deductions.
Ways to Preserve Your Investment Property Portfolio Against Economic Downturns
How should your investment property portfolio stay afloat amidst an economic downturn? How should you build your property portfolio to prepare and efficiently handle common market obstacles?
An economic downturn is a significant decline in economic activity over a prolonged period. Economic downturns can directly and negatively affect the property market and, essentially, the market value of a property. There are ways to effectively protect and preserve your investment property portfolio against these economic downturns. However, the preservation of the property portfolio shall depend on the investor’s risk tolerance.
⦁ Consistent Cashflow
The first is to concentrate on consistent cash flows. Residential and commercial real estate investments that are self-sufficient can generate stable cash flow through economic cycles. Monthly leases allow rents to be adjustable according to the market rent. Cash flow strengthens over time as long as you pay down your mortgage. Cash flow also increases with higher real estate valuation. In economic downturns, investors must decide if they would lessen or add more of the amenities of their real estate investment.
⦁ Limit Investment Fees
Limiting investment fees doesn’t mean limiting what you should spend on investments. But instead, in times of economic downturns, investors must analyse their investment processes, such as expenses and other deductibles from income. Other features to consider may be brokerage, middleman fees, and management fees. To limit investment fees, investors must search for alternative options to redirect their losses.
⦁ Reduce Debt
Besides limiting investment fees, reducing debt can also help property owners lessen hefty loan balances during low-interest rate periods, especially during economic downturns.
⦁ Tenant Amenities
Amenities are nonessential but are valuable features or services to entice new tenants and keep long-term tenants happy. The maintenance and the quality of amenities can increase the rent price, but it ensures that the rental property is always in demand.
⦁ Diversification of Investment Property Portfolio
Diversification of the portfolio essentially means investing in more comprehensive and varying ranges of properties. Factors like property class, location, and investment strategy define the diversified investment property portfolio. Conservative investments help reduce risks during economic downturns, but aggressive investments can be beneficial during economic growth. Of course, the property portfolio must not be overly diversified as it will be confusing if the portfolio shall be used as a reference for future endeavours. There should be a balance to the diversified investment property portfolio.
Every investor’s investment strategies are unique to their personal goals and objectives. This includes their preference for schemes and approaches to managing their property portfolio. Some prefer to start from scratch, buy land and construct new investment projects. Others prefer to purchase new houses and maintain the property over a long-term period. And they may be those who prefer to buy old properties which they can renovate and creatively flip. It is always important to consider relevant strategies for protecting and preserving your investment property portfolio.
How to Identify your Next Investment Property to Add in your Portfolio using Portfolio Analyser
VIDEO TRANSCRIPTION:
Once logged in on the main dashboard, click Tools and select Portfolio Analyser.
You’ll be presented with 5 different property columns, where each column represents a different property.
All fields have been pre-populated to help you get started. All non-gray fields or boxes are user editable.
You can change the values of Property Price, 10 Yr. Avg. Annual Capital Growth, Vacancy Rate, Deposit, Rent Per Week, Values under Recurring Costs and all the non-gray fields.
The Gray fields are non-editable as it has formulas on them.
The Stamp Duty is automatically calculated based on the state you selected.
You want to know what type of property you should be buying based on how your current portfolio is performing.
As an example, you plan on buying your 4th investment property and you want to know what strategy you would be looking at on finding your 4th one.
Let’s say you bought your first investment property at $500k thousand, with a Rent of $400 per week, and have a 20% deposit or 80% LVR. Since the property is a house let’s put zero or nill on Strata.
Then you bought your second investment property at $700k thousand, with a Rent of $400 per week, and have a 20% deposit or 80% LVR. Since the property is a house let’s put zero or nill on Strata.
Lastly, you bought your third investment property at $900k thousand, with a Rent of $500 per week, and have a 20% deposit or 80% LVR. Since the property is a house let’s put zero or nill on Strata.
Under Portfolio Summary, you’ll see your portfolio’s overall performance.
You can see that your overall portfolio is negative cashflow by almost $10k per year.
This means that for your 4th investment property you will need to look for a cashflow positive property with a decent growth to balance your portfolio.
But different property investors have different goals which the above may or may not be the right strategy to help you get closer in achieving your set goals.
Crunching numbers to identify your next strategy for your next property to buy and balancing your property portfolio made fun quick and easy with SuburbsFinder’s Portfolio Analyser Tool!
Check out “Crunching the Numbers: Positive Cash Flow vs. Negative Gearing“
Factors that Affect Investment Property and How They Develop into Investment Strategies
What are the factors that can affect investment properties? What are the possible factors needed to construct investment strategies?
There are a lot of features to consider in order to develop investment strategies. Personal factors of individual investors configure the quality of their property portfolio; these factors are cash reserves, risk and time tolerance, and investors’ level of involvement in their investment.
Listed here are common factors that can affect real estate investments and how they eventually develop into investment strategies.
⦁ Prices and Cashflow
Prices in the real estate market follow the economy’s cycles; this also includes the interest and mortgage rates.
Whereas cash flow is the movement of money in and out of an investment, business, or company. Cash flow can also refer to the amount of money left after expenses. Positive cash flow indicates a good rate of return on an investment property.
Rental yield is the amount of rental income an investment property produces annually compared to its total value. The property value should also regard the property purchase price and other additional costs.
Formulating the gross rental yield:
| Gross Rental Yield = ((12 * Monthly Rent) / Property Value) * 100 Or Gross Rental Yield = ((52 * Weekly Rent) / Property Value) * 100 |
Situational Example:
| You have a property worth $480,000, and it’s rented weekly at $430. Gross Rental Yield = ((52 * $430) / $480,000) * 100 Gross Rental Yield = 4.66% |
The higher the rental yield the better the investment. Rental yields are used to compare between potential investments. This becomes an investment strategy that considers the appreciation and return of investment.
⦁ Location and Availability
Location of an investment property is an important factor for profitability in real estate investing. The accessibility of the investment property determines the ease and convenience of owners, users, and possible tenants. The proximity of public amenities, scenic views, and community spaces are features that can boost a property’s value.
There are advantages to properties found in public and private subdivisions. Private subdivisions can provide more security especially for residential properties. Public subdivisions typically have more access to public transportation and commercial areas.
Certain available utilities and services that can assist the investment property must also be taken into consideration. Establishments such as fire and emergency services, water and electricity distribution centres, and hospitals.
“Get your Access to our Fully Customisable Investment Property Research and Analytics Tool Now!”
To determine the right investment property, you have to take into perspective the capabilities and evolution of an area over certain periods. An urban land use plan regulate various zones which is an outline of what possible projects and developments can be established in that zone.
For example, commercial zones can utilize institutional establishments that are nearby. However, constructing industrial manufacturing facilities next to residential properties can disrupt people’s daily life especially at home.
Understanding the urban land use plan of your designated city or town can provide you a wider viewpoint of the long-term development of the area. These developments can back up the value of your investment property. You can determine how favourable or unfavourable the existing and future developments can be towards your investment property.
⦁ Investment Potential and Profit Opportunities
Real estate investors expect investment properties to generate rental income, profits from property-dependent business activity, and long-term appreciation. Owner-investors most often benefit from inflation since rental income can be increased.
Capital growth is the increase in investment value over time, this is measured by the investment’s current value to its purchase price. There is a need to examine the investment potential of a property with positive cashflow because it essentially has lower capital growth.
Negative gearing is the exact opposite of positive gearing (or positive cash flow). Negative gearing occurs when the property income produced is less than the expenses applied to the maintenance of the property. These expenses can be property expenditures, loan and insurance fees and possible depreciation.
Losses incurred from negative gearing can be used as an investment strategy since it can produce tax benefits. Investment net loss reduces taxable income thus reduces tax payable. Although it is an investment strategy, it may be disadvantageous if the property income and equity is used to acquire new loans or grow your property portfolio.
⦁ Demographics
Demographics are statistical data of human populations used especially to identify markets. The statistical data provide basic information of potential buyers like age, income range, employment status, regional property preferences and what kind of properties are bought.
Major shifts in national demographics can greatly impact real estate trends. Declining birth rates and inclining retiree population can alter the system of retirement plans and wealth accumulation. Property portfolios are typically constructed focusing either the younger or the older population, however that doesn’t mean that it is an easy strategy. Each generation of the population require different needs in their day to day life.
⦁ Property Development
In order to charge higher rent, the property value of your investment must increase. To increase property value, you can simply implement improvements to the property. There are various levels to develop properties: land banking, buy-and-lease/rent, buy-and-sell.
Land banking is the instance of buying undeveloped land for future sale or eventual development. It is a strategy which investors do by holding parcels of land for certain amount of time and then selling it to another investor or a developer for profit.
Check out “How to Increase Cashflow?: Go From Negative $3,000+/yr to $21,000+/yr Positive Cash Flow”
Buy and selling properties is another property development and there could be two strategies to it which depends on the timing. Short-term buy and sell properties give small to medium profit since the property shall undergo construction and sold at a profit upon completion. Long-term buy and sell properties are construction projects and after completion, it shall be held for intrinsic property value appreciation. Investors typically buy properties with existing buildings and selling them after conditioning the structure or its interior.
| Renovating and sell – process where a property is bought to repair, restore, and clean the building to raise the property value before selling the property to an owner or investor. Property Flipping and sell – property flipping is similar to property renovating but on an extensive operation. Investors buy cheap properties and giving the whole place a new makeover in order to sell them at a high-cost. This strategy is rather risky as cheap properties are commonly very old and may not be up to modern building standards. |
Buy and lease/rent is a property development which provides an investor consistent passive income and long-term property value appreciation. Real estate investors may personally become the landlord, but if the property development is burdensome then there could be an organization initiated by the investor to manage the property. The difference between rent and lease is the duration of stay. Rent is a short-term agreement typically monthly arrangements while lease is a long-term agreement that covers a 6-month or 12-month rental periods.
| Refurbishing and rent – properties that are bought and refurbished furniture and updated fixtures before rented to tenants. Renovating and lease – properties that are bought and renovated. The property added new features and amenities, redecorated and updated furniture and fixtures before leased to tenants. |
With the level of property developments, there are also two types of property development that would depend on the investor’s strategy and personal goals. These two types are the active and passive development. Active property development is where the investor personally manage the entire investment property by themselves. Passive property development is investing on a project investment which is operated and maintained by another party. The execution of investment strategies on property development shall depend on the scale of investment and resources which the investor can supply.
Importance of Balancing Investment Properties and Corresponding Property Portfolios
Why is balance important in investment properties? Why do you need to balance investments property for property portfolios?
Balancing investments is essential since it minimizes risk and maximizes profit for the property portfolio. The resiliency of an investor is shown through the stability of their investments. The stability of an investment portfolio can be exercised by balancing various investment properties. Although one strategy for investors is to micromanage which is to focus on a small cluster of properties and possibly a single property itself, it may be a little uneconomical.
Let’s say that your property portfolio is a ship and all your investment properties were cargo on that ship, focusing the cargo on one side of the boat may eventually lead to the demise of the whole boat. If one whole cargo overweighs the various other cargo, then the ship will be tipped which will eventually sink during its journey.
A balanced property portfolio spreads out the risk amongst different property classes and locations. Circulating your wealth across several varying investments ensures that there are alternative sources of income even if there is an economic downturn.
Diversification of Property Portfolio through Diversified Market
Why should property portfolios be diversified? How to diversify property portfolios?
A well-diversified property portfolio excels against a concentrated portfolio. Investing on properties listed in different regions, and experiencing different market conditions reduces irregular risk. The point of a diversified portfolio is that you can take advantage of properties that are prospering in certain markets. A diversified portfolio can also mitigate the potential losses of other properties in declining markets.
It may be convenient and possibly irresistible to purchase a property block within the same street or suburb. Even though the properties may end up having the similar rental income and prove to bring in positive cash flow. However, if the suburb experiences an economic downturn, then you’re stuck with investments in a soft rental market.
Investment properties distributed amongst different locations and varying markets decreases the chances of your investments slowing down the overall financial growth of the portfolio.
