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Building a property portfolio

May/June 2022

Rental growth has been growing steadily as the post-pandemic recovery prompts tenants to return to the city. Capital cities, regional areas, houses and units all saw an increase in rents in the first quarter of 2022, culminating in the highest calendar year growth rate since 2007 (source: CoreLogic). Whilst vacancy rates are falling sharply in Melbourne, rents are rising steadily.

Property shortages, strong demand and rising yields are contributing to an increase in confidence for investors. In fact, the value of new investment loans doubled to around $11 million over the 12-months to the end of March 2022 (Source: AFR).

Property can be an attractive investment and one that should always be considered in a well-diversified wealth creation strategy. In this article we take a look at some considerations to keep in mind when building your property portfolio.

Do your research

Investing into blue chip locations are preferred compared to high-risk zones. Locations where demand is higher will provide lower investment volatilities and more consistent growth. These areas may be within specific school catchment zones to prestigious schools, have great public transport links, close to shopping facilities or an abundance of recreational and sporting facilities. With greater Melbourne forecast to grow from 5.1m inhabitants to over 8m by 2050, the demand for these areas will continue to stay strong well into the future.

Be sure to purchase at the correct stage in the market cycle. Each location and property type will have a different time that is right to buy. Seeking guidance from property professionals can help guide this purchase.

Head versus heart

The psychology of investing can lead to poor decision making. Purchasing one of the largest assets you will ever buy may feel overwhelming but be sure to purchase with your head and only partially your heart. Calculate, analyse and set a maximum purchase price and stick to it. When it comes to an investment it should predominantly be about the numbers; however, if you can’t see yourself living in this property then neither may others.

 Also consider your tolerance to volatility - property values will fluctuate over time and you need to be confident your strategy will be robust through all market conditions.

Get your finances in order

Analyse your spending habits to ensure your cashflow can allow for saving a deposit and afford the property purchase.  Where possible, invest to get a higher return from your savings but not so high that you risk losing your deposit. See what beneficial government incentives could be available such as the First Home Loan Deposit Scheme, First Home Super Saver Scheme or Stamp Duty Concessions. And should you become sick or injured, make sure you have personal insurances to protect your property and yourself.

Interest Rate Hike

On Tuesday 7 June 2022, we saw the Reserve Bank of Australia (RBA) move on its official cash rate of 0.35 percent to 0.85 percent, an increase of 50 basis points (bps). The increase follows on from the 25bps raise in May and marks the largest jump in 22 years (since February 2000). This increase was the first back-to-back rate hike in 12 years and starts a trend for further increases.

Many economists had predicted the move would be in the range of 25bps to 40bps however the RBA Governor Phillip Low explained the monetary policy decision by stating “The size and timing of future interest rate increases will be guided by the incoming data and the board’s assessment of the outlook for inflation and the labour market. The board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time.”

Understanding your monthly buffer and ability to make repayments is a key component of ensuring your financial stress does not become a reality in this ever-changing market. With interest rates on the move, it’s important to anticipate the increase and stress test your budget prior to making any large financial decisions

No one likes paying tax

Property is one of the more heavily taxed asset classes and when personally owned, could be taxed at up to 47%. However, alternative tax structures can result in tax rates anywhere from 0%-37%. A potentially beneficial tax structure is superannuation with a tax rate of between 0%-15%. If used correctly the financial outcomes can be significant - however, this structure comes with increased legislation and rules that must be adhered to.

Consider asset protection. It is prudent at the time of acquisition to purchase it in the correct structure, as  personal ownership can limit your asset protection capabilities.  

All investments come with an element of risk. Understanding your tolerance to these risks will help you make a smart property choice that meets your intended strategy.

Manage and review

Once you have purchased the property ensure to seek the professional guidance of a property manager. They will be able to take away any day-to-day stress of dealing with the tenant and keep your investment at a high standard.

Like any good strategy you must check in and review you are still on track. As life changes so should your strategy - it should never be set and forget.  Long term growth of equity in your investment property will provide the opportunity to strategically and effectively continue to build your wealth portfolio, while seeking advice and guidance can result in a successful investment property purchase that can help grow your wealth and achieve your long term goals.

At Partners Lending we provide lending advice based on strategy, cash flow and goals specific to our clients’ particular circumstances. This detailed understanding assists in providing advice that takes into consideration the potential impact of rates rises and cost of living. For more information on the above and to see how we can assist in navigating through the current lending environment with confidence, contact a lending advisor from Partners Wealth Group today on 1800 333 143.

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