When clients speak to me about creating a large property portfolio that will help them reach their long-term financial goals, there are always a number of key factors that we need to discuss that will determine just how large their portfolio could ultimately become.
While we will always seek to buy high-quality properties in blue-chip locations, there are some key variables that will be different for every investor.
Here are 3 key factors that will determine how large you can grow your portfolio.
Personality type
In business and in life, everyone has a slightly different personality type. This is a very important consideration when it comes to investing in property as it will be important when we look at what might be possible.
The most obvious difference is usually in how much risk an investor is prepared to take on. This often has to do with factors like their long-term goals, current work situation, their family situation and their belief about what they are going to need financially in the future.
An obvious example is a young single professional that is earning a high salary, compared to someone who is later in their career and wanting to put some things in place for their retirement. It’s a lot easier to take risks when you’re young and the time factor is always significant when it comes to compound growth.
Borrowing capacity
Arguably the most important factor when it comes to building a large property portfolio or just investing in any form of real estate is borrowing capacity. The way borrowing works is that if you are wanting to build a large portfolio you are going to need a strong income that is growing over time.
This is why highly paid professionals and business owners are the ones that are best positioned to acquire a large number of properties. Many highly paid people like business owners are looking for ways to use some of their substantial cashflows to diversify and property is normally a great fit.
While there are many experts out there that tell you that you can create a large property portfolio on an average wage, the reality is that you’re going to run into borrowing constraints and that will ultimately stop you in your tracks unless you become very creative with your finance and deal-making.
Strategy
The final piece of the puzzle is just how aggressive you’re prepared to be when you start to build your property portfolio. Many investors are content to simply purchase a property every few years, pay down some portion of the principle and use the growing equity to continue to expand.
A more aggressive approach is to simply take out interest-only loans to maximise your cash flow and then continually look to use more of your earnings to purchase additional properties whenever you’re able to access finance.
The most aggressive approach usually entails taking on strategies like developments, renovations and subdivisions which allow you to now only purchase properties but also very quickly manufacture equity. This supercharges your growth potential but also means that you are needing to contribute more money and have a steady ability to borrow.
Ultimately, just how large you want to grow your property portfolio comes down to the individual. What’s right for me might not be right for you. Your goals will certainly be different from mine. The most important thing is to take into consideration what your financial goals are and to determine if your current work situation and borrowing capacity are going to allow you to purchase the properties that you need to get you to those goals.
If you are interested in the above, feel free to reach out to a Henderson buyers agent today for more information.