How does building a portfolio work?

Discussion in 'Investment Strategy' started by sharkling, 17th Mar, 2020.

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  1. sharkling

    sharkling Member

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    Hi everyone

    I'll be upfront and admit I do not understand how building a property portfolio works and the strategy that investors use to build a profitable portfolio which generates passive income whilst managing debt. I wonder if anyone can be kind enough to explain in simple terms how is it possible to invest in multiple properties and be able to manage the debt that accumulates. Otherwise, if you can recommend reading material that explains this, it would be much appreciated.

    Personally, my partner and I are interested in purchasing our first IP and to build on that so that I can generate decent passive income (eg $50k per annum post tax) in 5-10 year's time. I looked through a few similar threads and it seems that this is a naive view or is it actually possible?

    Because I am currently a busy stay-at-home and have limited time to research and do the groundwork, I am contemplating using a buyer's agent to help with purchasing the IP and to provide advice on how to build a property portfolio. Obviously they come with a good-sized fee, so I'm not sure if this is even worth it. Advice on whether this is a good idea would be appreciated.
     
  2. Morgs

    Morgs Well-Known Member Business Member

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    A good BA will be able to help you put together an accumulation strategy but as you've already identified the finance piece is crucial in being able to put together a portfolio; as is putting together the right framework from the start.

    The books I read early days into property investing are all a little irrelevant (like Peter Spann's books) as the environment has changed significantly. Income is the key to servicing; and although debt is as cheap as it has been historically chasing yields can be challenging.
     
  3. Shogun

    Shogun Well-Known Member

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    1 million dollars at 5% is 50k per year. So your portfolio will need to be more than that. In 5 to 10 years. Good luck
     
  4. Jess Peletier

    Jess Peletier Mortgages, Finance & Property Strategy Aust Wide Business Member

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    Hey and welcome to the forums :)

    You're welcome to join our (free) investor kick start - it's an entry level mini course to starting to create your property strategy.

    The link is below in my signature.

    There is very little out there that goes into the nuts and bolts of creating a property strategy, and nearly everything you'll read is woefully out of date.

    OR written by someone who wants to teach you THEIR strategy - which may not be suitable for you, given your borrowing capacity and life situation.

    These things are not one size fits all, and yet that's how they're broadly promoted.

    We just finished up our last round and it was heaps of fun!
     
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  5. sharkling

    sharkling Member

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    Thanks @Morgs for the reply. Can you give of me a rough idea of what sort of income is needed to service the mortgage for multiple properties and when do the lenders put a stop to how much they would lend? Does one need to be a high income earner, say more than $100k per year, to be able to invest like this?
     
  6. Beano

    Beano Well-Known Member

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    1.75 rent to interest LVR 70pc Walt 5+
     
  7. euro73

    euro73 Well-Known Member Business Member

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    The key to building a large portfolio that will eventually produce an income for you isn't in the buying. Buying is relatively easy - right up to the point where you exhaust your borrowing capacity. Everyone who can qualify for a loan can do that. But beyond the initial 1 or 2 or 3 purchases that can be completed before you reach your borrowing limit, the key consideration evolves into the holding of the portfolio, then later, the growing of the portfolio. Both holding and growing require that you manage cash flow and borrowing capacity well, and in my view at least - start paying down debt - because growth wont get you more money if you have reached your limits - only increased borrowing capacity will... and there are only a few ways that can be achieved. Debt reduction, a very large payrise or an inheritance or other windfall. Payrises, inheritances or windfalls are not really within your immediate control, and in some cases are not possibilities. debt reduction is.

    For mine, buying properties that can pay themselves down under P&I is now the best , safest and most effective way to approach things if your goal is to buy and hold and grow for passive income. It used to matter far less how you managed cash flow and debt reduction. To be honest, you could basically ignore it completely because of the use of "actuals" , which allowed endless IO and provided increased to borrowing capacity with every rate reduction. That produced stellar results for many investors for the best part of 3 decades, but it is over now because of the changed loan assessment rules. . Loans are assessed with a 2.5% buffer and at P&I remaining terms, and living expenses are scrutinised far more aggressively now. Bottom line, if you dont pay down debt, you can snooker yourself.

    Think of it like dividend reinvestment. If you purchase properties that produce a dividend and reinvest it back into the portfolio as debt reduction, whether the asset values go up or down or sideways, the debt will come down , the income will increase, and your ability to borrow will improve.
     
  8. Omnidragon

    Omnidragon Well-Known Member

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    Lending is harder these days but an MB can probably help you, albeit not sharpest rates.