In last month’s newsletter, we introduced the concept of developing a systematic approach to creating and growing your property portfolio. We talked about the importance of treating the buying of property as a process, wherein all the various critical elements are carefully mapped out, as opposed to treating the purchase as a single transactional event.

Given that the national property market performs at such different levels at any given time – in particular the fast rising Sydney property prices – now, more than ever, it’s crucial to gets things right from the start in order to avoid making costly mistakes that could drag down the performance of the rest of your portfolio.

In this month’s article, we continue on with our review of each step of the end-to-end investment process and examine the importance of establishing the right investment framework;

Step 1 – How to Develop the Right Initial Strategy.

Before commencing, it’s important to first gain a thorough understanding of your existing situation in order to then build an action-oriented investment strategy that is relevant and in line with your overall investment objectives.

Being clear on your objectives will enable you to ensure that there’s alignment between these and your budget, risk profile, specific goals and the intended acquisition time frame. This is the first, critical step in establishing the parameters of your property investment portfolio.

As Benjamin Franklin’s well-coined phrase goes, “Fail to plan. Plan to fail”…

Your overall investment success will be closely correlated with the amount of time and effort you put into planning prior to the investment itself. It’s not just about getting things “fairly right”… It’s about building a portfolio that will outperform the market and your success in this regard will be underpinned by a carefully planned and executed investment strategy that has been structured according to your specific circumstance and requirements.

Getting it right by following the plan will save you time, energy, heartache and money throughout the investment lifecycle of the asset.

So, where do you start…

As Steven Covey posited, “begin with the end in mind”.

The first thing to do is to perform an ‘initial review’ – either on your own or in conjunction with your financial adviser.  Review your goals and aspirations and become familiar with the various options available to you. There will likely be many more options available to you than you might have first thought but you’ll need to assess the various risk profiles associated with each and consider how well / not well each of these might sit with you.

The key is to keep your plan fairly simple and to not overcomplicate things from the start. Remember, the plan that you put in place is one that you’ll be able to revisit in time in order to measure performance and reassess your goals.

As I mentioned in our last newsletter, it never ceases to amaze us how people spend more time researching the purchase of a new vehicle than they do a property. For an asset that is 20 to 30 times more valuable and will be the most expensive acquisition made in their lives, it makes no sense whatsoever to leave so much of the investment process to chance!

So, back to the plan…

In conducting your initial assessment, you may already have one or more properties in your portfolio and, naturally, it would make sense to take a pulse check of their performance to-date;

  • What is the overall distribution of my portfolio? (asset class, location, configuration etc)
  • What are the market values for each property?
  • How much equity have you generated in each?
  • What are the rental yields relative to local market conditions?
  • What opportunity is there to improve and how does this relate to the steps in your plan?
  • How will adding another property to the portfolio affect your short/medium and long-term goals?

Again, by considering your end objectives, it will clarify your thinking in context of your current situation and the next steps required in order to bring you closer to achieving those goals.

Additionally, planning appropriately in advance will enable you to work through the various structuring options and their associated strategic benefits before you find yourself putting pen to paper on a purchase contract and finding out later that it might not have been such a good idea to acquire that asset in your personal name.

The cost of unwinding a poorly structured asset will far outweigh any potential gains you might have been hoping to make along the way. More on structuring at a later date…

Equally so, planning ahead will enable to you to research the various financial products available to you and properly assess their suitability. Simple “rate chasing” may not be the best for you in the long run. Again, we’ll discuss finance strategy in forthcoming newsletters.

Given that property investment is generally a long-term proposition, consider the length of time that you intend on holding the asset and, consequently, such aspects as renovation and/or redevelopment potential are two areas where you can really supercharge the performance and, in turn, returns of the property. By identifying an asset that has a value-add opportunity, you can conduct pre-purchase feasibility analysis in order to verify the viability of the project and compare estimated costs and project timelines with budgets and objectives.

Doing this in advance will enable you to check and recheck your calculations, compare to goals and objectives and discuss with your team of advisers – all ahead of making a single offer. The idea here is that, in the event that the numbers don’t stack up or the prospective project doesn’t match your overall investment objectives, you have nil risk because you have bought the property yet!

Timing – map out the intended timeframe of your investment plan by comparing your investment objectives with your current situation. The wider the gap between your current situation and the intended goal, the more capital (and time) you’ll require to reach the goal.

Remember, all goals are achievable in time when coupled with the right advice, an appropriate risk-assessed plan, leverage and the power of compounding growth.

Last but not least, your property investment strategy should be something that you revisit regularly. Be sure to review it with your adviser team and consider its performance in context of your changing circumstance and taking into account local and wider market conditions. Be sure to conduct regular “pulse checks” of your portfolio and don’t be afraid to make adjustments as you go.

Stay tuned for next month’s article – (Steps 2 and 3: Structure and Finance Strategy) of ‘The 8 steps in creating and growing your property portfolio’.

Written by RAMON MITCHELL, General Manager – Property Advisory Services at IPS.  Ramon is a fully licensed real estate agent and buyers agent with more than 15 years’ experience in all facets of residential real estate including property investment advice, buyers advocacy, sales, project marketing and development. IPS believes that investing in residential real estate is a process, as opposed to a single event. IPS has a full end-end approach to residential property investment and portfolio management, ensuring their clients’ property goals are achieved efficiently and effectively. For more information, call 02 9324 8841 or go to www.ipsg.com.au or email info@ipsg.com.au

 

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