FEATURE COVER

Build
your
empire
Even the biggest property portfolio starts with a
first purchase, so how can you make sure you lay
the best foundations for success? Kate Miller reports

50 www.firstpropertybuyer.com.au OCT.2010
 sk most Australians what they think
represents the best investment
opportunity and the bulk is likely to
say that it’s property. And based on
past performance, they would not be wrong.
Australian property has been a stellar
performer in terms of capital growth for
many years, doubling in value on average
around every ten to 12 years. And while past
performance is no guarantee of future returns,
as many a financial planner will tell you there is
every indication that property should continue
to deliver to the astute investor for many years
to come.
While many buyers aspire to owning an
investment property, a property portfolio – i.e.
more than one income producing property – to
some is the holy grail of wealth building.
Wealth, freedom and an improved lifestyle
are just some of the outcomes associated with a
successful property investment strategy.
Indeed, done well, a property portfolio can
dramatically increase your personal wealth as
well as your day-to-day income.
Done exceptionally well, it can reduce or
completely remove the need to work in order to
earn an income.
But how realistic is a property portfolio for a
start-up first time buyer, and more importantly,
how should you go about building one from the
ground up?

Getting started
There are a number of elements involved in
establishing a property empire but perhaps the
best place to start is in understanding the power
of leveraging.
Leveraging refers to the strategy of
borrowing capital in order to magnify
your investment returns. It’s possible to
borrow money for a number of investment
opportunities, however, property is one of the
most accessible – and arguably the safest –
option open to most people.

OCT.2010 www.firstpropertybuyer.com.au 51
 FEATURE COVER
In Australia, investors can borrow up to
80 per cent of a property purchase price – or
even up to 95 per cent with lenders mortgage
insurance – meaning it’s possible to build
wealth from a fairly low base.
The bigger deposit you have at your disposal
the better, however this depends on which
market and what type of property you’re looking
at. First time investors may find they can enter
the market with as little as $20,000 deposit.
While for some this may only give the
smallest initial foothold in the market, it is a start
– something which can be built on over time.
Laying the foundations
But building a successful property portfolio
starts well before the contracts are signed on
your first purchase.
Aspiring property investors should spend
as much as 6 to 12 months researching before
embarking on their property journey, says
Chris Gray, author of The Effortless Empire .
“That will ensure you’re well informed
on where and what to buy as well as how
much you should pay,” he says.
“The more research you do the better your
first investment is likely to be, and the fewer
mistakes you’re likely to make.”
Your property research should be varied
top 10 tips for building a property portfolio
1. Your first purchase forms the 7. Avoid negative minded people who
foundation for a successful portfolio – tell you your goal is not possible – these
get it right. are the people who will work their
whole lives and have little to show for it.
2. Do your homework and never
impulse buy. 8. Don’t get too hung up on devising
the perfect strategy. At least get in
3. Don’t experiment or try to predict the market and develop your strategy
the market. Play it safe. as you go. The sooner you enter the
market, the sooner you can build equity
4. Don’t expect to get rich quick; be and build your portfolio – but don’t
prepared to work hard. make impulsive decisions in order to
achieve this.
5. Don’t buy out of your local area
without due diligence. 9. Be very careful to budget and don’t
forget outgoing expenses.
6. Don’t overcommit – you want to
improve your lifestyle later in life, but not 10. Only take on renovations that add
at too big a cost to your lifestyle now. instant value.
52 www.firstpropertybuyer.com.au OCT.2010
and range from reading books and magazines
to surfing the internet, inspecting properties,
speaking with experts and attending seminars
and exhibitions.
“The more you read and the more qualified
people you speak to, the more likely you are to
have a better strategy which will make you more
money in the long run,” Mr Gray says.
But while research is essential, Michael
Bentley, of CityLife Property Group, warns that
armchair buyers may end up wasting valuable
time.
“Don’t be one of those people always
watching the market, or worse, searching the
internet every night looking for bargains.
“You can’t do it from behind a computer
screen alone – hit the pavement and understand
the market,” says Mr Bentley.
Setting your goals
Building a property portfolio is a long term
undertaking and so it’s essential to have long
term goals if you’re to ensure your objectives
are realistic and achievable.
Here’s your chance to spend a little time
dreaming about what you’d ideally like to
achieve: retired by 40; yacht in the harbour;
endless cash f low; chucking in the day job...
Sounds a little self-indulgent, but it’s good
to imagine in an ideal world what you’d like to
accomplish.
It’s then time to apply a little common sense.
There are going to be certain limitations to
what you can achieve, such as the time you have
to build, available cash f low, ability to service
your loan commitments and your earning
potential.
You’ve got to be realistic from the outset or
you’ll end up either making rash decisions or
becoming disheartened. If you find yourself
ahead of your projections a few years down the
track, you can always realign your goals.
The first place to start goal setting is to
determine your budget for that all important
first buy. The best way to do this is to arrange a
pre-approval through your mortgage broker or
lender to set your borrowing limits and allow
you to frame a research and purchasing strategy.
Once you know exactly how much you can
afford to borrow, and what your property price
range is, you can get down to the business of
scoping the market for properties.
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Get it right from the outset
The first property purchase should perhaps be
considered the most important as it will lay the
foundation for a successful portfolio.
But your first buy will also be a learning
curve – something that can be refined as you
move forward.
While diligent planning will minimise the
margin for error, there’s always going to be
room for improvement in the future.
“While you need to be thorough in your
approach, the first property should in some
ways be viewed as a test,” explains Philippe
Brach of Mutlifocus Properties.
According to Mr Brach, the first purchase
enables new investors to see how the whole
property process works, what the holding costs
are, and what professionals are needed to help.
The first purchase is also often about being
comfortable enough and feeling ready to make
that all important first leap into property.
Look for a property that is
completely uncompromised in terms
of growth prospects
“We see a lot of clients who are thinking
about purchasing but the first purchase really is
the biggest hurdle, it’s the hardest step to take,”
says Mr Brach.
The first property investment also marks
the perfect time to build a strong support team.
A successful property investor is always
supported by a team of professionals,
including a good mortgage broker or lender, an
accountant and a legal consultant.
“Once you have a good team of professionals
you can use this same team to support you
throughout your subsequent purchases,” Mr
Brach says.
 FEATURE COVER
Cash flow considerations
Budgeting is crucial
to any successful
investment strategy but
it is often something that
first time investors fail to
do – setting themselves
off for a very difficult,
if not unsuccessful,
investment path.
“We often find DIY
investors get this wrong,
particularly in terms
of underestimating
54 www.firstpropertybuyer.com.au OCT.2010
Investment property number one
When it comes to your first investment it’s
crucial to buy smart; and capital growth is key.
First time investors should look for property
that will grow quickly in value, or which
presents opportunity to add value instantly
through renovation. This will enable you to
build equity quickly and get onto property
number two sooner.
“You need to look for a property that is
completely uncompromised in terms of growth
prospects,” Monique Sasson Wakelin, from
Wakelin Property Advisory, says.
Investors should look for properties which
will always be in high demand but of which
there is finite supply. To a reasonable degree
this requires a common sense approach –
imagine yourself as a tenant in your prospective
property: is it close to public transport, what
are local amenities like, is there a school nearby
and is there a park to walk the dog?
While you might think growth prospects in
up and coming markets might be stronger, the
experts advise against experimentation.
“It’s not a time to predict the future when
buying your first investment,” Ms Wakelin says.
“The first purchase is perhaps the most
important as it lays the foundation for a
successful portfolio. Be absolutely vigilant
about buying the right property.”
expenses along the way,” outgoings, which can be
says Monique Sasson planned for, there are
Wakelin, from Wakelin also unexpected costs
Property Advisory. such as tenants failing to
There are a lot of pay rent, being without
costs investors need to tenants for a prolonged
consider, such as rates, period, major repairs or a
strata fees, water and rise in interest rates.
property management For this reason
fees as well as any every property investor
shortfall between rental must build a buffer or
return and outgoings. slush fund in case of
On top of these emergency.
Finance matters
Property investors should consider finance as
their ticket to ride; without the right financial
advice and loan structure, your portfolio is
never going to take off.
When it comes to embarking on property as
an investment strategy, it pays to arm yourself
with the assistance of professionals.
Wendy Higgins, a Mortgage Choice broker
in Glenelg East, South Australia, says a broker
with a strong focus on investor clients, or even
a keen interest in investing themselves, is a
particularly wise choice.
“Would-be investors should look for a broker
who is already investing in property as they will
understand how to structure the finances with
what they have in mind in terms of their long
term [investment] objectives.”
Ms Higgins also advises prospective
investors to consider their long term goals and
plans when considering property investment.
“At some stage you will need to consider
insurance needs, including income protection
insurance, life insurance and even landlord’s
insurance,” she says.
With lender policies differing from lender to
lender, an astute mortgage broker can also align
your investment goals with the right lender.
Exactly what kind of loan might suit a first
time investor will depend on every borrower’s
individual circumstances, such as your starting
deposit, whether you plan to live in the property
at some point or rent it out, and just how
quickly you hope to build a portfolio.
Moreover, getting the finance right from the
outset will make it easier to manage a growing
portfolio down the track – ensuring that you
And when it comes to order to minimise any
adding future properties concentrated risks.
to your portfolio, For example, if your
Ms Wakelin says it’s first purchase is an
important to mix it up as apartment in the inner
soon as is possible. city, you might want
“Create diversity as to look at a terrace in a
early as you can.” more suburban location,
Diversity, in this or vice versa.
instance, refers to creating “It’s all about
a balanced portfolio eliminating property
of different property type and geographic
types and locations in risk,” Ms Wakelin explains.
allow scope for f lexibility and that you don’t
jeopardise tax deductibility.
In summary: with your finances structured
correctly early on, you’ll be much better
positioned to add properties to your portfolio in
the future.
Building your portfolio
For most first time investors the idea of owning
multiple properties can sometimes seem out of
reach, but it can be a reality.
According to Mr Bentley, it is entirely
reasonable to expect to build a small portfolio in
as soon as 12 to 15 years.
Exactly when you can add a second property
to your portfolio will depend on your individual
position however, but all things considered,
three to five years would be a reasonable
expectation, he says.
Essentially, it all depends on how much cash
you have to fund your next deposit and how
quickly your property grows in value.
“With your first property there’s not really
much you can do except sit and wait until it
grows in value, thereby increasing your equity,”
explains Mr Brach.
If sufficient equity has built up in your first
investment it is possible to tap into this asset to
fund another purchase.
Essentially this involves borrowing against
your first purchase to fund, or part fund, your
next property.
This can be a highly effective method of
fast tracking a property portfolio, but it is not
without risk.
If you’re drawing funds from your first
property to fund your second purchase, it is
essential to remember that you’ll generate less
cash f low as repayments on the mortgage will
be higher.
Add to this the burden of another loan
for the new property and your finances could
be under a greater strain – especially if the
property is substantially negatively geared.
If you consider gearing a portfolio through
increased borrowing you need to also think
carefully about the impact of future rate rises on
your cash flow and what might happen if one – or
both sets of tenants – vacated without warning.
The rule of thumb is the greater your
leveraging, the greater the risk – so if you are
thinking of choosing this path, consult your
accountant before making any decision.
Don’t be one of those people always
watching the market, or worse,
searching the internet every night
looking for bargains. You can’t do it
from behind a computer screen alone –
hit the pavement and understand
the market
Wealth creation
While rental income can go a long way towards
helping you cover the cost of your mortgage, it
is capital growth that will fundamentally enable
you to build your property portfolio.
“Without capital growth you won’t create
wealth. Positive cash f low properties will
generate some ongoing income, but not enough
to make anyone rich,” Mr Brach says.
Unfortunately capital growth and strong
rental yields rarely come hand-in-hand and
there is usually a trade-off between the two.
First time investors therefore need to find
the best balance by weighing up holding costs
versus capital growth.
For example, a property in a
prime real estate market may
offer strong capital growth
but its rental return may
not be much greater
than the rental
income on a property in a
less appealing area.
Your loan, however is going
to be much larger in a prime
location so your rent will only go
so far in covering the costs of
your home loan.
If you were to continue to
purchase only prime properties
such as this, you may limit
yourself to a small number of
properties simply because your
regular income will not enable
you to service all the loans.
For this reason it is important
to mix your portfolio
up with properties that
deliver different
returns.
OCT.2010 www.firstpropertybuyer.com.au 55