Why You Need To Build A Property Portfolio
The benefits of investing in real estate are endless. Investors can enjoy continuous and predictable cash flow, excellent returns, and tax advantages, not to mention the possibilities to leverage real estate to build wealth.
Cash flow is the net income from a property/investment after mortgage payments and operating expenses have been made. A key benefit of property investing is its ability to generate cash flow, through a number of different strategies (which you can learn more about here). In many cases, cash flow only strengthens over time as you pay down your mortgage—and build up your equity.
Tax Breaks and Deductions
Property investors can take advantage of numerous tax returns, deductions and business grants that can save you a lot of money. Which in general, you can deduct the reasonable costs of owning, operating, and managing a property.
You can depreciate the cost of buildings but not the land, and since the cost of buying and improving an investment property can be depreciated over its useful life, you benefit from decades of deductions that help lower your taxed income.
Many property investors make their money through rental income, any profits generated by property-dependent business activity, and appreciation. Property values tend to increase over time, and with a good, well researched investment, you can turnover a profit when it’s time to sell. Rent also tends to rise over time, which can lead to higher cash flow.
Build Equity and Wealth
As you pay towards a property mortgage, you build equity—an asset that’s part of your net worth, and as you build equity, you gain the leverage to buy more properties, increase cash flow and your wealth even more.
Another benefit of investing in real estate is its diversification potential. Property has a low—and in some cases negative—correlation with other major asset classes. This means the addition of property to a portfolio of diversified assets can lower portfolio volatility and provide a higher return per unit of risk.
Real Estate Leverage
Leverage is the use of various financial instruments or borrowed capital (e.g., debt) to increase an investment’s potential return. A 20% deposit payment on a mortgage, for example, gets you 100% of the house you want to buy—that’s leverage. Because property is a tangible asset and one that can serve as collateral, financing is readily available.
Competitive Risk-Adjusted Returns
Property investment return potentials vary, depending on factors such as location, asset class, and management. Still, a number that many investors aim for is to beat the average returns of the S&P 500—what many people refer to when they say, “the market.” The average annual return over the past 50 years is about 11%.
The inflation hedging capability of property stems from the positive relationship between GDP growth and the demand for property. As economies expand, the demand for property drives rents higher. This, in turn, translates into higher capital values. Therefore, property tends to maintain the buying power of capital by passing some of the inflationary pressure on to tenants and by incorporating some of the inflationary pressure in the form of capital appreciation.
The Bottom Line
Despite all the benefits of property investing, there are drawbacks. One of the main ones is the lack of liquidity (or the relative difficulty in converting an asset into cash and cash into an asset). Unlike a stock or bond transaction, which can be completed in seconds, a property transaction can take months to close. Even with the help of a broker, it can take a few weeks of work just to find the right counterparty.
Still, property is a distinct asset class that’s simple to understand and can enhance the risk-and-return profile of an investor’s portfolio. On its own, property offers cash flow, tax deductions, equity building, competitive risk-adjusted returns, and a hedge against inflation. Property can also enhance a portfolio by lowering volatility through diversification, whether you invest in physical properties or not.
There are several different strategies for property investing, some are focusing on generating cashflow for the short term, and some others are focusing on building long term wealth. These strategies are conflicting due to their nature. If you are new to property investing and just starting out, you need to be careful about choosing the right strategy, to avoid wasting time or efforts in working on the wrong strategies.
There is no right or wrong, good or bad, these are just different tools for different purpose. The choice of strategies should be based on your personal circumstances, skill sets, other resources, network, short and long term goals.
If you have a lot of time and no money, the key objectives should be cashflow generation at first. You should then look into, and research property strategies such as deal sourcing, Rent2SA, Rent2HMOs, or joint venture flipping; so you can use the minimum amount of money to get maximum return over a period of short time. However, the price you pay, would be your own time and work that you put into learning.
If you have funds available but you have a limited amount of time, then you could focus on a different strategy to build long term wealth in building a property portfolio. If you don’t readily have funds available, there are other strategies that you can use in order to raise finance, and leverage money.
No matter how you get your first buck of cash, whatever your circumstances, you invest some money to get started, to build your portfolio, and build it over a period of time, then you have created a portfolio that will generate cash for you, these are asset based portfolio, value of the property will grow over a period of time, whilst at the same time you will have cashflow from rental, that being a single let, HMO, or serviced accommodation unit.
You could also start by building up a combination of both. By starting out from a cashflow strategy, and then later moving towards building your own property portfolio. One thing is certain, if you do not have property, you cannot run a property-based business. So, you need to either rent the property from other landlords or make a start on your own property portfolio and buy your own.
We host FREE online workshops, to which we share our tried and tested system: “How to buy 10 houses in 10 months”. We reveal the secrets, and methods which we used in order to buy 18 properties over a short period of just 2 years, resulting in a multi-million-pound property portfolio using this strategy.