Building a well-structured portfolio: Q&A with Jarrod McCabe

Here at Property Observer we talk a lot about buying your first investment property or home, getting your foot onto the ladder and the mistakes you may make earlier on.

However, for many property buyers it’s about planning for a portfolio of properties – rather than just the first one.

For today’s Q&A we spoke to Wakelin Property Advisory’s associate director Jarrod McCabe and asked about how crucial that first purchase is and where it fits in to building a portfolio.

If there are any questions you’d like to see answered, or experts you’d like to see asked, email us with your thoughts: jduke@propertyobserver.com.au.

What type of property should first time investors be looking at?

Typically, a first-time investor has bought their own house and has some equity in that property. Usually they are employed and have identified some surplus income they feel they would like to invest rather than consume. Often the investor has time on their side – they have 10 or 20 years or more until their envisioned retirement date – and so they are investing for the long-term.

Under these circumstances, a first-time property investor should be seeking a property that is likely to deliver strong capital growth. It is the year-on-year compounding effect of this growth that will deliver the return they are after. 

How crucial is the first investment property to building a portfolio?

The first property is vital.  Get this right and in a few years it will generate sufficient equity to finance the addition of a second property.  Ideally the aim is to repeat this process a number of times.  But if the first property is a dud it won’t deliver the equity to go to stage two. Instead, the investor is stuck with a non-performing asset.  Their best move is then to recognise the error, sell this property quickly and start again. 

However, invariably it takes several years before the investor faces up to the reality of their situation. Not only do they lose thousands of dollars in transaction fees and forgone capital growth, but they lose the most valuable and irreplaceable resource of all – time.

What does the 'perfect' portfolio look like?

A perfect portfolio would consist of a number of assets situated across a number of blue-chip suburbs in one or more of our larger capital cities. There would be a balance of one and two bedroom apartments in the portfolio as well as a number of single fronted period cottage or terrace homes. 

All the properties would be older-style and be situated on attractive, leafy residential streets with good proximity to local amenities. The apartments would be in smaller boutique blocks with allocated off-street parking.  There would be a range of architectural styles including Victorian, Edwardian, Art Deco, and 1950s through to 1970s.

What does it mean when people refer to “diversifying” their portfolio?

Diversification – not having all your eggs in one basket – is of course just as valid for property as it is for other asset classes. 

In the ‘perfect’ portfolio above, this is achieved in a number of ways: selecting both houses and apartments, selecting one bedroom and two bedroom properties; mixing up the architectural styles; and by selecting properties in different suburbs – and possibly different cities.

But you can over-diversify, if that means compromising on other investment criteria such as sticking to property with scarcity value. So I wouldn’t recommend buying a high-rise property just so I can claim diversification.  One also has to weigh up buying property outside your own state in order to achieve diversity against the increased uncertainty that comes with investing in a less familiar place.

See over page for more on building a portfolio, knowing when to stop acquiring properties and whether or not you should sell.

How quickly should a portfolio be built?

Property investment is not about how many properties you have. Rather it’s about building equity. Only invest in the next property when you have the equity to do so and the spare cash-flow to finance it.

How do property investors know when to stop acquiring properties?

Eventually investors recognise they have reached a point when they have achieved their financial aim or they are at a life-stage when they no longer wish to accumulate assets but reap the benefits of those assets.

Do you believe in 'never sell'?

‘Never sell’ is a good state-of-mind to have when investing. It’s the attitude that these assets are locked away for the very long term; that the investor won’t be selling if the property market has a cyclical fall and that they are determined to accept a lower disposable income today in return for greater rewards tomorrow. It is also a recognition of the very large costs involved in property transactions. Of course, this is all predicated on buying quality assets in the first place.

But naturally, life does not always go to plan, and there may be personal reasons why one would sell. 

How do you judge the success of a property investment portfolio?

It probably takes a few years before this can be done. A successful property investment portfolio is one that repays the sacrifices made in the early years of ownership to establish and nurture it. It does this by generating enough rent to not only cover all costs, but to pay out a healthy income on top. It also continues to grow in value every year. And it is so well managed by your advisers that it require little input from the owner.

Any ideas for a Q&A you'd like to see? Email us: jduke@propertyobserver.com.au

For more Q&As, click here.