How to grow a winning investment property portfolio
Imagine if you could earn an income without having to work. It’s an appealing concept and one that’s entirely possible with a portfolio of income producing properties. In our recent webinar we explored just how to do this.
It's no secret that property is a sound strategy to build wealth, with more than two million Australians now calling themselves property investors. But what separates an investor with one property from those with an income-generating portfolio?
Founding Directors of DPN, Sam Khalil and Lloyd Thomas, share their 25 plus years’ experience in property investment to help you grow a winning portfolio, become financially independent and live the life you want.
The majority of Australians outlive their super
It’s a surprising fact that only 4% of Australians generate $84k per annum as a retirement income. This achievement generally stems from a firm plan and strategy towards earning a passive income, factoring in changing circumstances, the cost of living and life expectancy. Many people don’t realise that to live the life they want in retirement, around $75k net income is required per year.
So while there are now 2.3 million property investors in Australia, just 6% of these investors have three properties in their portfolio. Furthermore, 60% use negative gearing as a strategy, which often results in a loss of money based on the hope of making it back on capital gains. The bottom line is, you need a property portfolio of substantial size to generate enough income for retirement, calculated on future value and allowing for growth when you stop working.
There are two types of property investment returns; capital growth and rental return. The negative gearing strategy focusses on making a capital gain while losing money on the rental return. “In that sense a negatively geared investment shouldn’t be considered a true asset,” explains Lloyd.
Positively geared investments are the focus for DPN, who take a strategic approach to property investment. By choosing property types which offer a stronger rental income advantage, such Dual Income and Duplex designs which deliver two rental incomes from the one property and often generate a cash flow positive income from day one.
Why positive income investing?
Lloyd is passionate about positive income investing, saying that these properties can be regarded a true asset, as they will appreciate over time, as well as deliver an income. But what should investors do with their income? DPN advise they establish financial structures, to use the income strategically by reducing personal debts - debts that are not tax deductable - and then pay off investment debt after that.
Leveraging the equity in your home
If you have your own home, you may be able to unlock the equity to finance investment properties. Equity is calculated by subtracting the debt remaining on a property from the property’s current value. For example, if your property is worth $600,000 and you owe $350,000, then the equity is $250,000.
This does not mean you will have the ability to access the full amount. Often, they will use a calculation based on an 80% LVR (loan value ratio). In this example equity can be calculated as:
Equity (max. LVR 80% of property value):
Potential lending capability
Moving to a portfolio of income generating properties
The portfolio approach is a process of building on your investments in a timeframe that suits your circumstances. For example, a portfolio of three properties might feature a combination of duplexes or dual income properties with multiple tenants generating income. Positively geared investment properties will also assist to improve your position with the banks, as lenders take into account the investment income generated, so you’ll have more leverage to invest in your 2nd, 3rd and 4th properties.
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The other point to know about building a portfolio is the power of amplification. This is discussed in more detail in the webinar, where they use the example of a three property portfolio, worth $2.16 million in today. How will that look in 15 years? Even when you conservatively assume a 5% capital growth p.a. and 2.5% rental growth p.a., the portfolio value in 2035 is $4.27 million. That’s just the value of the assets, when you account for the rental income, the story is even better. As you can see in the illustration, the rent grows over time, with the portfolio delivering $63.5k p.a. in 2035.
To find out how others have generated six figures annually with a portfolio approach we recommend watching the webinar, where you’ll get more details and real life examples of how DPN customers have built their property portfolios.
This information is provided by DPN Pty Ltd ABN: 94 630 700 186, Australian Credit Licence 514759. DPN Finance Pty Ltd is an authorised credit representative 504129 and a related entity of DPN Pty Ltd. Casa Capace Operations Pty Ltd ABN: 79 624 981 184, NDIS provider Number 4050038018 trading as Casa Capace.