Residential property investment has various categories, and where you sit is determined by what you are aiming to achieve with you investment, as well as your Investor Profile. You could own a property that you live in (buy-to-live), you could own a property that you rent out to a tenant (buy-to-let), or you could do both these things concurrently. You could choose from many gearing of financing options, or you could aim to payoff and own your properties out right as soon as possible. No matter your particular situation, the consistent factor is the asset itself (the property) and how you “package” that asset to serve your individual needs is completely up to you.
This post will explore the different strategies you could take in setting up your own property portfolio that serves your individual needs. If you are already invested in property, this post will give you some insight into how to change the structure of your investment to better perform to your requirements.
Your Investor Profile
Before you begin to understand the many avenues you could take in investing in property, you need to understand your specific financial situation, investment requirements, lifestyle and long term goals, which grouped together create what we call an Investor Profile. Your Investor Profile will help you understand what type of property investment category you belong, and how best to build and tailor your property portfolio to suit you.
To build out your Investor Profile you will need to go through a series of questions (which you can do by getting hold of LucreVest) which will ultimately detail the following:
- Your Investment Style
- Your appetite for risk
- Your cash in-and-out flow capacity
- Your individual time-lines and investment term/terms
- Current v/s ideal exposure
- Your ideal investment portfolio
Once you have discovered your unique Investor Profile, the process of assessing which type of portfolio best suits your needs is much easier. But why is this so important?
Why it is important to tailor the structure of your investment
The wonderful truth about property is the flexibility one has when structuring an investment that caters for that specific individual. While the underlying asset remains the same, different portfolios can cater for a diverse range of people with unique situations and needs.
On the other side of the coin, it must be understood that should an individual invest in property, but does not ensure they have the correct structure in place, that investor could find themselves in a difficult situation where the investment does more harm than good.
The types of portfolios
Depending on your Investor Profile, you may fall into one or more of the following portfolio types.
- Buy-to-let, and buy-to-live
- Buy-to-let, Let-to-live
- When an investor owns property that is rented out, but does not live in their own property, rather paying rent where they live to increase their mobility.
Un-bonded property ownership
While there are fewer investors who have the option of cash buying properties, the option exists all the same, either in your individual capacity if you have the means, or as part of a shared portfolio.
Cash buying properties is typically done by high net worth individuals who are more interested in building solid passive income streams, with a lens on long term growth and capital appreciation. This can also be achieved by a group of individuals who own a property together as part of a shared portfolio which we will discuss later.
Bonded property ownership
Financing or bonding a property is a path commonly taken, and is a great means to access an asset that would otherwise be out of reach. With this type of investment, it is critical to get the best deal from your financing partner to ensure you have a fare rate of interest, and that your payback term is structured to suit your Investor Profile.
Fast-burn debt repayments
An investor can chose to service their debt over a short term, increasing their monthly expense and decreasing the term of repayment. With this strategy, the net amount of interest that is accumulate is lower and as such is a good avenue for investors with free cash.
Slow-burn debt repayments
Extending the payment term of the bond to the maximum term allows for the investor to maximise the bond facility, and may also result in passive income from the bonded property (rental incomes exceeding bond repayments). The downside here is that the amount of accumulated interest over the term is significantly higher, which ultimately decreases the amount of income made one can make over the long term from the investment.
Property Shares and Shared Portfolios
Property shares between individuals and families is not a new concept. Pooling funds together to increase buying power, then sharing in the benefits of the procured asset is a popular concept. There are two clear differentiations here. One is where a group of people share in a property that they actually use (such as a holiday home), called a Property Share. The other is when a group of people share in an investment property for the purposes of generating wealth, called a Shared Portfolio.
A Shared Portfolio is when a group of people all contribute their funds into a company that is jointly owned by them. That company then purchases a buy-to-let property that generates income and appreciates in value. It is then possible to begin exploring gearing and other strategies to maximise returns. This is a popular choice for investors who want to benefit from property investment, but do not want to service a bond and don’t have the funds to cash buy.
When we talk about gearing, we are referring to the ability of the investor to utilise his/her balance sheet to acquire more assets through means of financing. By gearing a portfolio an investor can build a larger portfolio that will amount to stronger long term growth through capital appreciation.
It is vital for this gearing to be done correctly as over gearing can have catastrophic consequences. For instance, at a low interest rate, an investor can make a small amount of income via multiple properties and enjoy the benefits of multiple assets appreciating over time. However, should the interest rates increase, the investor will be paying in an amount per property every month, which can put a huge strain of cash flows. It is therefore critical that the gearing of a portfolio be highly informed and is executed with care.
A lens on debt
It is very important as a property investor to understand your relationship with debt. Do you consider debt to be a bad thing that should be serviced as soon as possible? Or do you view debt as a mechanism for growth?
One is not better than the other and it comes down to what suits you and your portfolio. On one hand, being debt free can bring security and peace of mind to one’s life. While on the other, maximising your exposure can lead to a drastic increase in the growth of one’s portfolio. At the end of the day it all comes down to your Investor Profile and what you want out of your investments.
Utilising debt, if done correctly can afford an investor the benefit of building a portfolio that is geared towards long term growth. The main benefit being that debt is used to acquire income generating assets (properties) that cover the cost of servicing the debt, allowing the investor to take full benefit of the capital appreciation of that property.