How do I build a property investment portfolio?

A property portfolio is your collection of properties. It's all the property you own as a group.

So, when people talk about building a property portfolio, they want to buy more houses.

First-time investors might wonder: "How do I plan and build a property portfolio?"

It's a great question because there's a lot to decide.

You've got to figure out what to buy and when. You've also got to calculate how many properties you can afford to buy. Here are the main steps.

Step 1: Work out how much money you have to invest

Your first step is to figure out if you can buy your first investment property.

Let's take the example of Bill and Jean. They're 47 and 48 and live in Wellington.

To invest in property, they need enough income to afford the mortgage. They also need enough deposit (equity) to buy properties.

Here's something that often surprises investors. You can often borrow the deposit for an investment property against your own home.

This seems simple to some people.

But I've been a financial adviser in the industry for 20 years. I've seen how many people light up when they hear about this. And it's called the No Cash Needed method.

Let’s apply it to Bill and Jean. This couple have owned their own home for years. It’s worth $800,000, and they have a small mortgage. They only owe $200,000 to the bank.

That means they’ve got a lot of useable equity (deposit).

So they could borrow up to $440,000 against their home as a deposit for investment properties.

Amazingly, that means they could buy investment properties up to the value of $2.2 million. But that’s only from a deposit perspective.

They also need enough income to get the mortgage approved. That's a bit harder to calculate.

So you can use a calculator like this to run your own numbers:

Step #2: Build a portfolio

Once you know you can afford your first investment property, it's time to grow your portfolio.

It's often best to start with properties that go up in value faster. These are called growth properties.

However, these properties often require investors to 'top-up' the mortgage each week.

This is because the rent often doesn't cover all of the costs of owning an investment property. This is sometimes also called negative gearing.

So, Bill and Jean might buy their first property in Christchurch. It might cost $550,000, and they use the No Cash Needed method.

This might max out the amount Bill and Jean can borrow. So they can't afford to buy another property right now.

So, how do they keep growing their portfolio?

Over time, their incomes will go up. They'll get pay rises.

On top of this, the rent and value of their investment property will likely go up.

All this means that, eventually, the bank will lend them more money for their next rental property.

This is often hard to forecast. So, I hired someone who is in the top 20 in the world for Microsoft Excel to build me a spreadsheet.

Yes, there really is something called the Excel World Championships!

If Bill and Jean earn $90,000 each, they might be able to buy up to 5 investment properties over the next 15 years –

This is a 'spreadsheet scenario' where all the numbers go up smoothly. In reality, the path would be more bumpy.

And if they did this, how much money might they make? My projections suggest Bill and Jean might make $1.85 million through investing. That's just from the properties increasing in value.

Step #3 – Buy property in different locations

What kind of properties are Bill and Jean buying in the above scenario?

I've run the numbers on them buying affordable properties in affordable cities.

This creates an aggressive scenario. It shows you how far they could go.

But, rather than buying as many properties as possible, it'd also be a good idea for them to diversify. That means buying properties around the country.

That includes Auckland, Wellington, Christchurch, Dunedin, Hamilton and everywhere in between.

This is important.

In property investment, we often don't warn you about putting all your "eggs in the same basket".

Instead, we talk about not putting all your properties in the same housing market.

Why? Property prices sometimes go up. Sometimes they come down. And for long periods, they'll stay the same.

But here in New Zealand, each region's property market tends to operate independently.

Property prices in Auckland can be skyrocketing while Wellington is flat. In other times, Wellington will be booming while Auckland prices will go backward.

Auckland prices increased 86% between 2010 and mid-2015. Wellington prices were up only 6% over the same period.

But then, what happened between September 2016 and April 2020?

Auckland was up 6%, whereas Wellington house prices were up 43%.

What's the message? It's not to buy in either Wellington or Auckland. It's to invest in multiple property markets. That way, it's more likely that you'll have at least one property in a booming market

Step #4 – Sell up and create a passive income

After 15 years, how much money might Bill and Jean make? My projections suggest their rental properties will be worth $5.4 million.

This is with $3.59 million worth of debt secured against them.

That means the couple is projected to have just over $1.8 million worth of equity.

At that point, they would likely sell their properties to start earning a passive income.

They could invest some of that money in a managed fund and slowly spend the money. That's called the Nest Egg strategy.

Or they might buy high-yielding properties and live off the rent. That's called the Golden Goose.

Investing in property has given Bill and Jean options. They now have money to start enjoying their retirement.

When can I buy my next investment property?

Investors often ask me: "After I buy my first investment property … when will I be able to buy the next one?"

Investors often get “tapped out”. That’s when the bank won’t lend you any more money.

It happens all the time. It’s part of the life of property investing.

If you use a build-and-hold strategy, then the three main ways to increase how much you can borrow:

1. capital growth (your property increasing in value)
2. increasing your income
3. increasing your rents and
4. paying down debt.

This is where you can use a spreadsheet to project when you might have the ability to buy another property.

I'm not ready to release the spreadsheet that my top 20 in the world Excel champ has made. Not yet. I'm still tweaking it.

But you can get it for free at our upcoming webinar. It's called "5 houses in 5 years | How many houses can I actually buy before I retire?" Click here to come along and sign up.