A step-by-step plan to build a portfolio of cash flowing deals.
Building a property portfolio can be a complicated and tricky road to navigate.
Which is why proper planning is essential – and why a roadmap is the best tool to keep you on track.
Were you good at building Lego as a child?
It’s funny how kids can sit down and build Lego creations without any fear of failure. They understand the parts they need for the foundations, how to make the project structurally sound and how to let their creativity drive the finished product.
Head of Binvested, Nathan Birch, says building a property portfolio is much like building something from Lego. You can’t build the top of the structure if you don’t have the footings in place. And you can’t build the structure properly unless you know what type of blocks to use at each step of the way.
It sounds simple doesn’t it – yet, so many adults can’t fathom how to build a property portfolio because they think it is too complicated and too hard.
Well, it’s time to simplify the process. While we can’t give you an illustrated Lego guide that shows every piece you need to connect, we can streamline the process into 11 steps.
Gather your pieces.
But first, it is important to understand that everyone’s position is different. We are all trying to build different creations and will need different types of building blocks to help us get there.
Some of us only have a few blocks at our disposal, while others have many. This is why it is impossible to apply a one-size-fits-all approach to building a portfolio. As always with property investing, the way you achieve your goals depends upon your own unique set of circumstances.
Step 1: Work out where you are.
Before building something, before plotting a trajectory, you need to know where you are starting from.
Are you a high income earner with no equity to your name? Or, are you rich in equity with little cashflow? Are you nearing retirement, or at the start of your working life? How much capital do you have at your disposal? These are all questions you should consider.
Then, it is a matter of assessing your budget.
“Having an understanding of your budget and what you can afford with that budget is crucial,” says Nathan.
This will help you identify how much money you are able to put into your investing. It can also help you figure out if you can tweak a few things in order to save more.
Step 2: Work out where you want to be.
There’s no point buying investment properties for the sake of it. It is important to know exactly what you would like to achieve so you can develop a strategy to minimise risk and maximise success.
How much passive income would you like to achieve by investing, and how many properties would you need to own outright to achieve this? Nathan says, if you look at properties that bring in $300 a week rent, it will give you a good indication of what you can achieve.
For instance, four properties would bring in $1,200 a week in rent, which would generate more than $60,000 a year in passive income.
“You don’t need a massive portfolio to be financially free. You could do it with as little as four properties. It depends on how big your goals are and what your expectations are,” says Nathan.
Step 3: Assess your resources and options.
What have you got at your disposal to get things cracking? Do you have a $50,000 deposit saved up? Do you have excellent serviceability? Or, do you have a PPOR with $200,000 equity in it?
Then, it is a matter of weighing up the different options at hand. Could you tap into equity? Could you save up a deposit by cutting back expenses?
“In one hand you’ve got resources and in the other you’ve got options and then it’s a matter of working out a plan of attack,” says Nathan.
Step 4: Forge a plan of attack.
How many properties do you need to buy and how will you do it? It may be that you need to buy 8 properties and hold them through a property cycle. Once they have doubled in value, you could sell off half and have four properties unencumbered that will bring in $60,000 a year.
What sort of property do you need to buy first? If you have a good income but no equity, you may need an equity rich property. Or, if you have a low income but a good starting capital, you may need a cashflow rich property.
“Build that jigsaw puzzle that is going to be financial freedom,” says Nathan.
Each property you purchase is another piece of the puzzle or Lego structure you are making. Make sure you choose the right pieces to increase your chances at finishing it.
Step 5: Create some contingency plans.
Nathan says, it is essential to have a Plan A, plan B, plan C and a plan D. Then, you should have a plan B for the plan A, and so on, to cover your bases.
Consider the things that may not go to plan and make sure you protect yourself against these risks.
Buying below market value will create a buffer if you need to sell the property shortly after purchase. Buying in a good growth area will minimise the risk of negative equity. Having a strong cashflow and good renter demand will help protect your bottom line.
Step 6: Simulate where you would be.
If you had done this ten years ago, where would you be today? Would you be leaving the workforce, or would you still have a way to go?
“The past leaves clue to the future,” says Nathan.
Trying to simulate where you would be now can help you assess if your plan is going to help you achieve your dreams.
If you execute your plan today, will you be able to retire in ten years’ time? Is there a better way to move forward that you haven’t considered?
Step 7: Develop a strategy for financing your portfolio.
Say you wanted to buy those four properties that would bring in $60,000 a year in rental income. If they were $200,000 each, then you would need $800,000 to purchase them.
Since most people don’t have $800,000 just lying around, it is likely you will need to get loans to finance these purchases.
A $50,000 deposit may be the starting point for the first purchase, but how will you move onto the next three? Will you be able to use the equity from your first property to purchase the next?
Speaking with a finance strategist that has expertise in building portfolios can help you structure your lending to give you the most mileage. They can also ensure you get the right type of loans for your needs.
Step 8: Buy your first two or three properties with a good idea of what they will do for you.
Don’t just buy anything – buy with a strategy, says Nathan. Getting a good deal is only one part of the equation, he says. It is essential to know how each property will bring you closer to achieving your goals.
Each property should bring something to the table that will help you with the next purchase. They should also help to create a strong foundation.
What you are looking for will depend on what you are starting out with.
But Nathan says, specifically for this market, it is best to stick with metro properties at an entry level price range of $150,000 to $200,000 for the first few purchases.
Step 9: Manage your properties.
Investing is not just about purchasing – it’s also about managing your assets. Organise property managers, landlord insurance and a bookkeeping system. Have a good accountant on board who can maximise tax benefits and streamline expenses.
Step 10: Identify the next lot of challenges.
Before you can move onto the next few purchases, you need to go back to step one to identify where you are now at.
Nathan says, it is good to buy with an idea of how each property will help you, but you can’t always foresee the challenges that may occur from day one.
If you are aiming to buy ten properties in total, Nathan says it is best to get the first two or three sorted before reviewing your situation. Once you have figured out a strategy to move forward, you can move onto the next few purchases, and so on.
“It’s a constant: Where am I, where am I going? What do I need to do to get there?” he says.
Step 11: Develop strategies to pay down debt.
While we have included this as the final step, it may be something you need to work on at an earlier time.
There are a range of ways you can pay back your debt; whether it be through buying and selling for profit or buying twice the number of properties you need and waiting for them to double before selling half.
The strategy you chose will again depend on your position, what you are trying to achieve and the resources you have at your disposal.
Steps 1 to 7 are all about making sure you have the right mindset, knowledge and support to build a property portfolio. Here, you’re laying the foundations of the house. The next steps are all about construction – you’re starting to build the structure of the portfolio and it’s important to build a structure that will support the finished product. Once the structure is in place, you start to add the finishing touches that make a house a home (or, in other words, turns a goal into an achievement).
It won’t happen overnight.
Nathan says, building a portfolio of cashflowing deals requires a good level of commitment. Many people become demoralised or frustrated because they feel things aren’t moving quickly enough.
But it is important to remember that buy and hold investing is a long term game.
“It’s a gradual progression. Those things are there as a tool to help you get to where you want to be,” he says.
“Whether that comes in two years, or four years or ten years – you’re not going to get there by not having the assets.”