Building an Investment Property Portfolio

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The whole idea around investing in property is to build long term wealth for yourself and your family, but what does this really involve?

Buying just one investment property and holding onto it until retirement won’t make you rich.  If it performs well, it will definitely be a nice asset to have with substantial equity and a small income stream to help out, but if it does not perform well you are left with an underperforming asset.

Buying two investment properties is better than buying one.  Of course, most people won’t be in the position to buy two properties at the same time, but two properties are better than one for the following reasons:

  • If one property underperforms, there is a chance the other one will do better and help even out the returns
  • Two properties means more exposure to long term gains because there is more invested into the market
  • Two income streams means that if one property is experiencing a changeover of tenants and stops paying for a few weeks, the other one should still be tenanted and keeping some cash rolling in

In the same way you would not pour all your money into one share on the stock exchange (unless you know something I don’t), you should not rely on just one property to secure your future.

Diversification

“Diversification” is the term that is used for spreading your investing over multiple properties.  I’ve just explained why two investment properties are better than one, and likewise, it is better to focus on building a portfolio of multiple properties rather than just one or two.

Even if you are getting into property investing in the later stages of life, you will want to try and have more than one investment property to help lower risk.  If you only have a limited amount to invest, it may be wiser to buy 2 or 3 cheaper properties rather than one higher priced property.

Adopting this strategy will help provide a buffer against times of vacancy and market conditions.

Exponential Growth of Equity

The other great thing about focusing on building a multi-property portfolio is the compounding rate of growth.  If on average, your properties return 7% per annum capital growth (which there is more chance of if your properties are spread over multiple locations), then consider the following scenario:

You buy one investment property for $200,000 and it is growing by 7% per annum so then it’s value starts increasing by $14,000 each year (and slowly getting larger every year).

A couple of years later, you buy a second property for $300,000 and your total portfolio value is now around $550,000 (assuming the first property has risen to be worth $250,000).  The 7% per annum is now $38,500 which means instead of growing at $14,000 each year, it is growing at more than double that rate.

Another few years later, you buy a third property for $400,000 and your total portfolio value is now at $1,100,000.  This is a rough example, so I’m assuming that those first two properties continued to grow as well.  Calculating our 7% per annum return gives us an amount of $77,000! So not only is your portfolio more diverse now, but because you continued to buy property, you’re now gaining wealth at a great rate of $77,000 every year which is a figure that will continue to increase on its own each year even if you don’t buy any more property.

But why would you stop there?

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One Response to Building an Investment Property Portfolio

  1. The days of making money on any property have gone. You need to take into account so many factors. A really good place to start is the old supply and demand principle. If the location you buy in has a high demand then prices will be more resilient.

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