Getting a Home Loan in Australia if you're living overs...
29 Nov 2023
Buying one property as an investment can be a good form of passive income
A property portfolio is when either an individual or a company owns a collection of properties.
Often, an individual will live in a property they own, and expand their portfolio by purchasing investment properties to rent them out.
These properties you invest in, and rent out, can either generate a positive cash flow known as ‘positive gearing’, or run at a negative cash flow known as ‘negative gearing’.
Whether your properties are generating positive rental yield or not, your aim will be to build this portfolio to see capital growth over time and generate equity.
There are generally two kinds of investment properties.
Properties that offer high rental yield, and can be ‘positively geared’ to cover the ongoing mortgage and management costs.
Properties that offer high capital growth, in new or developing suburbs, attractive to families, with long-term capital returns.
It is difficult to find properties that offer both, and subsequently, a balanced portfolio will include both kinds of properties, in a variety of locations.
This process is known as diversification. By diversifying your investment property types and locations, you are reducing exposure to risks associated with one property type or location.
Buying a property as an investment can be a good form of passive income, but having two, three, or more can be even better. Multiple investment properties are called a property investment portfolio.
Building a property portfolio from scratch sounds hard or even impossible, but this isn't the case. With the right mindset, the right strategy and plenty of research, you may be able to buy yourself two, three or more investment properties.
Let’s take a look at some of the best options to build your portfolio investments from scratch:
Set yourself a specific goal that's measurable and hold yourself accountable. A goal can be simple, such as a weekly passive income goal, which you can then expand to a yearly goal.
Or, your goal could be based on which type of property you plan to invest in, depending on your circumstances. Your strategy should center around your own income, and what you can afford.
You need to be able to put down a deposit to invest in a property, and this may impact whether your strategy is aimed at investment properties with high rental yield or high long-term capital gain. Use our borrowing power calculator to see how much you may be able to borrow for your investment property.
It’s important to do your research. Investing in properties with the strategy of positively gearing, means you need to understand the financial risk of having time between tenants, where you will be financially responsible for the repayments of the property.
Similarly, investing in properties with the intention of negatively gearing them, means you need to be aware of the tax implications of claiming deductions at tax time and what you are entitled to claim.
Home equity is the difference between the current value of your home and how much you owe on your mortgage balance. For example, your house is currently valued at $400,000 and you still owe $200,000. You would have $200,000 in equity. If you’ve built equity over the years, you can use this to buy an investment property. This can be a good way to get your first property in your investment portfolio.
Buying a property with someone can make it more affordable to get onto the investment property ladder. However, this can be quite tricky because misunderstandings may occur down the road. So it’s important both you and your partner have the same investment goals and strategies, agree with the terms and conditions, and with the ownership structure.
Rentvesting is when you buy an investment property to lease out, and then rent a property to live in. This strategy gives you the ability to maintain the lifestyle you want, while being able to start your investment portfolio.
Owner-occupied properties make up about 70% of the market. This means you want to buy a property that appeals to a large demographic, think of families, suburbs with good facilities like schools and shopping precincts. This means, generally, small new apartments in commercial high-rise buildings aren’t going to appeal to the majority of people, and historically, don’t generate strong capital growth. Remember, the location of a property is usually more important for capital growth than the house itself.
Buying off the plan for an investment property means you may be eligible for tax benefits. There are deductions you can make come tax time, so be sure to check with your accountant on how buying off plan can be beneficial as an investor.
In some states and territories, you may also be able to save on stamp duty because you’re buying a new property. Stamp duty is a compulsory government tax on purchases in Australia you have to pay when buying property.
Adding a self-contained unit, or ‘granny flat’ to your property can be a great strategy if you’re looking for long-term returns on your investment. It’s also a way to add value to a property without the disruption or risk of renovations or extensions.
If there are tenants in the home, you may be able to maintain a source of cash flow while building a granny flat. In the long-term, you have added rental returns to your property by having another ‘property’ to rent out.
Positive cash flow is where the rent is higher than the mortgage repayments and expenses. This means your rental income can cover the monthly repayments. If you create positive cash flow in your investment property, and you continue to purchase investment properties that generate positive cash flow, you will be able to service the loan and buy more property to build your investment portfolio.
Capital growth is not the only way to increase your rental income and value of your property, you can also do this by renovating your investment property.
You could renovate the kitchen or bathroom for a better rental return, or you can also do minor renovations like a new coat of paint or a new carpet. Increasing your rental income can help you service more properties and also increase your equity which you can use to buy even more properties.
There are plenty of other options to start building your investment portfolio. Check out our investment loan products to get you started.
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