Top tips for keeping a property portfolio in positive territory

As the Australian property market transitions towards a new market sentiment, the implications of increasing interest rates and rising inflation are becoming clearer. One of the challenges thrown up by this shift in market dynamics is whether investors’ cash flow is in a good position to weather what may be ahead.

Like many aspects of our lives, the ideal of the perfect investment property portfolio is intensely personal.

A property portfolio reflects the convergence of personal goals, investment preferences and financial circumstances, together with appetite for risk.

All property is personal

So, if your property portfolio reflects your investment values, then by implication, what works well for other investors may not be the appropriate property strategy for you.

In recent times, many property investors scaled their portfolios by buying older properties that they then renovated and subsequently sold at a substantial profit. Other investors made their return on investment by acquiring new properties and holding them over the long term.

It may require short-term attention to generate income from your property portfolio, building cash flow to the point where that it is self-supporting.

All investments should pay their way

Ultimately, all your property investments should pay their way, allowing you to acquire additional assets to build up your net wealth and ensure the portfolio is sustainable over the long term.

A typical property portfolio usually generates additional cash flow the longer it’s held. Those who strategise and then manage their cash flow in good times and bad will be in a better position to realise the long-term capital growth that the cash flow affords.

The converse of this cash flow model is that holding onto too many negatively geared properties during a market downturn has the potential to savagely bite into your cash flow and the ability to service any further debt – not an ideal position for an investor to be in.

If you find yourself in this situation, have you considered how you will manage your eroding cash flow and serviceability position?

Where does your property portfolio presently sit?

A strong investment property portfolio needs to be robust enough to perform well in a buoyant market while being able to weather cyclical downturns.

Here are some effective ways to raise the cashflow generated from a property portfolio to position investments firmly on a sustainable basis:

Smart options for increasing cash flow

• Renovate or refurbish? Property is a competitive sector. You need to keep your property fresh compared with competitors. If your bathroom or kitchen are seven years old or older, it’s probably time to look at sprucing up your property.
• Set up an annual review of costs, review ongoing expenses and pay particular attention to insurance and interest rates to ensure they’re competitive.
• Pay down the mortgage. Reducing debt is a smart way to address haemorrhaging cash flow.
• Look at the property’s current rent and consider an increase. With rents rising around the country, keep tenants engaged with small but regular incremental rent increases.
• Differentiate the property. Adding solar and a battery could appeal to prospective tenants looking for lower power costs. Do your due diligence and research your options. This initiative could attract tenants and support a rent increase.

There’s plenty of money to be made during the next economic downturn if you are well positioned to purchase a value-for-money property.

As the property market declines we will see more professional investors buying properties that have a value-add proposition, such as subdivision potential, distressed sales or properties that are being offered well under market value.

Getting strategy right

When it comes to investment properties, many investors begin with a similar ambition. Firstly, build a portfolio that generates positive cash flow enabling all outgoing costs to be covered by the rent. Secondly, consider a range of strategies that will sustain your ‘buy and hold’ position for the long term.

Again, positive cash flow and capital growth will occur over time if you have the patience and right strategies in place to realise those gains.

Making money during a downturn

Once your initial investment property performs well, and you’re financially secure, it’s time to think about adding a second property.

The key to getting your investment portfolio right is focusing on the financial performance of your properties, rather than obsessing over the number of properties in your portfolio.

Get your property strategy right and you can easily buy several properties that generate an optimal financial result rather than holding just one investment property and hoping it does well for you. It’s about having a sound strategy for each property that you add to your portfolio.

Lower risk by diversifying

To spread your investment risk and ensure your property portfolio remains sustainable, work to establish a diversified portfolio. You should also consider acquiring properties in different states or territories, to mitigate land tax issues.

Final observation

There's plenty of money to be made during this downturn. Once your investment property is on a sustainable basis, you will find yourself benefiting from a buoyant investment income. Remember to review your property costs and revenues annually to ensure your investment property portfolio remains firmly on track. It’s a case of set, but don’t forget.