How to build a property portfolio

As with most things in life, the perfect property portfolio is a personal thing. It depends on your financial goals, your financial circumstances, and how much risk you are willing to take — so what works for someone else may not work for you. One investor may make money buying older properties, renovating them and selling at a premium. Another may make money buying new properties and holding them for the long term. There are many ways to build a property portfolio, but there's one strategy that beats them all: balance. Regardless of your age, experience or financial situation, balance is the single thing that helps you maximise your profit and minimise your risk, and it's something you need to factor in if you want to succeed as a property investor.

What is a property portfolio?

A property portfolio is a collection of investment properties you own. Most property investors live in one of their properties and lease out the others. Typically, the rental income they earn on a property is greater than their home loan repayments. When the rental income is greater than an investment property's outgoing expenses, the property is said to be positively geared; when it is less, it is said to be negatively geared. Most investors build a portfolio with the goal of establishing an income stream that adds to their bank balance without them having to do too much work on a regular basis — so a positively geared portfolio is typically preferable to a negatively geared one.

What does a balanced portfolio look like?

Most property investors have a similar goal: build a portfolio that pays for itself each month and preferably grows in value each year. To do this, an investor needs some properties that produce high rental yields and some properties that deliver high capital returns. It is difficult to find properties that offer both strong rental yield and solid capital growth at once. Portfolio balance can also be achieved by following a policy of diversification. In other words, buying properties in different locations reduces your exposure to location-specific downturns, and investing in both residential and commercial property helps you ride out market corrections in either market.

How do I build a balanced property portfolio?

Each investor needs to take a slightly different path to reach the portfolio goal of positive cash flow and long-term capital growth — and it will take time, because property is a long-term investment strategy. The steps to build a property portfolio really depend on four factors: your income, your expenses, your wealth target, and the time you have to reach it.

1. Start with your goal and work backwards

You have to start with a goal so you have something to aim for. This keeps your property strategy focused and gives you something to refer back to when you need to make hard decisions. Your goal could be a passive income of a set amount each week or month by the time you retire. Once the destination is clear, every purchase can be measured against whether it moves you closer to it.

2. Focus on income first

There is a wide variety of properties and locations, all at different price points. Property investors need enough savings to pay a deposit and enough income to cover the monthly repayments on their home loan. That means those building a portfolio either need to wait until they earn enough to cover the rental losses on low-yielding, high capital-growth properties — or, alternatively, buy high-yielding, low capital-growth properties first, so they produce the income needed to cover expenses while the portfolio grows.

What properties should make up your portfolio?

Again, this depends on your circumstances and the goals you want to achieve — plus the timeline for reaching them. If you are just starting out and on an average salary, you will probably want to buy cash flow-positive or neutral properties first to get going. One thing worth noting if that's your goal: older properties on the edges of major cities can generally achieve higher rental returns because of their lower price points. As your income and equity grow, you can add higher capital-growth properties to the mix, using the cash flow from your earlier purchases to support them.

Financing each property

Every property in a portfolio usually needs its own home loan, and your borrowing power is shaped by your income, your existing debts and the rental income each property is expected to earn. Before you commit to a purchase, it pays to know exactly what you can borrow and what the repayments will be. Nook's loan calculators are a quick way to check your financial capacity, and when you're ready to finance the next property, Nook compares 20+ banks and runs the whole application for you — for free.