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A real estate portfolio can be an incredibly lucrative and stable source of wealth creation for the average investor. I have been playing the real estate game for a little under 20 years now, and in that time, I have amassed a property portfolio of 12 homes, with a value exceeding A$6 million (in a prolonged depressed market).
Some may find inspiration in this real estate portfolio. Others may find it trivial. Whatever your thoughts may be, I am immensely pleased with my current position. At the end of the day, the number doesn’t matter. What my portfolio represents to me is a return on years of hard work, effort, sacrifice, and hope that I will be better off in my future financial position.
While I sing its praises now, I was not initially convinced of real estate investment. Perhaps I was clouded by another dream. As mentioned in an earlier post, my family and I built our first home shortly after arriving in Australia. The home and land cost us A$181,000, and we were eligible for A$19,000 in grants from FHOG (First Home Owners Grant) and land developer rebates. A little over two years later, we sold that home for A$258,000.
The success we had on the sale of our first home birthed an idea. I would reinvest the gains received from this sale into future residential home purchases. Once built, my family and I will live in the home for a few years (maximum of 3), mainly to maximise the resale value of the home and avail myself of capital gains tax exemptions. I would then use those subsequent gains for further reinvestment.
My growth target was to build up towards a A$2 million home, after which point I would sell that property, purchase a modest home and then deposit the remaining proceeds as my retirement savings. I worked off a fairly conservative time horizon of 20 years to achieve this target.
Albeit, “man proposes and God disposes”. We built our second home for $384,000, and two years later, placed it on the market for $565,000. It was on the market for 86 days before I decided to pull it off the market with minimal fanfare. I did receive one offer, however it was a non-starter due to some peculiar and overbearing terms from the potential buyer.
This was a lesson that I was perhaps too blind to see or recognise prior to this point. The real estate market does not care about your vision. In most instances, you are a victim to its cyclical nature, and timing is seldom to your benefit. I live by the adage that ‘it is always a great time to be a buyer, but never a good time to be a seller’. Alas, from this setback came a clearer realisation – I don’t need to sell these homes to profit from them.
I decided to rent out the second home and proceed with constructing a third home as my residential property. At that point, I started to behave more aggressively towards real estate investing. To contextualise my approach, we completed the construction of the third property in January 2006, where I had one rental property. By January 2013, my portfolio grew to 5 single-family properties and 1 apartment.
I mention 2013 intentionally because it was a pivotal moment in our family history – my son had just accepted a position at a multinational consulting firm, and for the first time in his life, possessed sufficient disposable income to commence his own property portfolio. From there on, we grew the real estate portfolio to include an additional 6 properties.
My real estate portfolio strategy
In hindsight, my purchasing approach was not methodical. It may sound far fetched, but I can honestly say that there were instances where I wasn’t even contemplating purchasing a home, even during the very morning of the deal. I have been blessed with a few factors that allowed me to have, some may say, a blasé approach towards real estate investment.
- Timing. I started my property career during an unprecedented boom time in Western Australia’s property market, and from that, I was able to secure significant cash flow (through commission sales) which funded deposits for new investment properties.
- Stability. I was grateful that my wife was able to secure a high-paying, stable job, which allowed us to hedge potential downside risk in the event my property career went sideways.
- Incentive. The Australian Government has been considerably generous to real estate investors, from offering grants/rebates to negative gearing your properties.
If it wasn’t for these factors, I doubt my progress would have been what it is today.
Hard work is vital to building your real estate portfolio
While luck had a large part to play in it, I can not discount the effort and sacrifice that goes into real estate investment. While the term is traditionally used for new business startups/ventures, there was and continues to be a significant portion of sweat equity that goes into each investment property. This includes maintaining regular communication with tenants, or handling routine maintenance and upkeep activities. Some of you may choose to outsource these activities, and that is fine. I personally choose to do it to ensure I control the timeliness and quality, and save any money I can to reinvest into my existing properties or contribute towards new purchases.
For those of you just starting out and contemplating purchasing your first investment property, be prepared to put in the hard work yourself. Saving on third party maintenance costs (particularly those of the DIY grade) will really come in handy, if anything to cover the unexpected expenses that you may not have accounted for in your budget. Given it is one of the most ‘active’, passive forms of investment, you must be comfortable with getting your hands dirty during the process.
Strong financial hygiene will benefit your real estate portfolio in good times and in bad
DIY projects will help with the savings but proper financial hygiene and mindset will get you to where you need to be. As I progressed throughout my career, my commission income steadily increased (some years, over double digit growth). However, my expenses remained relatively flat.
It is not to say that I was scrounging over every dollar. My lifestyle certainly wouldn’t warrant an invitation to be part of the F.I.R.E movement. However, I convinced myself that I was living comfortably and that my outgoings did not need to match my increased incomings. Further, I instead began to focus less on my expense ratio and more on my savings ratio; i.e. how much I was saving and contributing towards investment each month. While this is just another side of the equation, I was encouraged to find ways to increase my savings ratio each month, which in turn reduced my monthly expenses.
Real estate is not like any other investment, so treat it differently
So up until now, what has been mentioned is, in one word, achievable. From a financial perspective, there are many alternatives to funding your real estate investment dream, whether it be through debt, equity, or a mix of the two. It’s also achievable for all of you sensible and frugal people reading this, to put in some hard effort when needed and tighten the purse strings on occasion.
But what do you do when you receive a call in the middle of the night, claiming that an interior door of one of your properties has been smashed in by a drunken tenant? What would you do if a tenant accidentally leaves water on in the bathtub, and it ends up flooding half the house and causes irreparable damage to some of the flooring? And, more poignantly, what would you do if a global pandemic reduces your likelihood of a stable rental stream, despite you still being on the hook to the bank for your mortgage?
These events will happen, sometimes more than once. The majority of the financial consequences can be resolved through insurance. But what about the emotional consequences? It is an incredibly stressful time for anyone to receive calls or messages which report damage to what is essentially your retirement fund. There is also a sizeable human piece, in that you are concerned for the safety and wellbeing of the tenant during these adverse times.
These events will certainly test your mental fragility. They will also test your relationships with those close to you. Given the considerable emotional cost involved, what you should be asking yourself before you make any investment is if you are willing to front the bad days that will inevitably arise.
How I got through these issues (and continue to get through them) is framing the consequences with perspective (e.g. a broken door can be replaced, wet floor boards can be replaced). I also strive to build strong, sustainable relationships with my tenants. Not only does it improve the likelihood of them renewing their leases, but it also creates a relationship of trust such that they care for my property as if it were their own. I have one tenant that has actually added tens of thousands of dollars in value to my property, just by keeping it in a pristine condition and including some very creative landscaping (with our permission). Our relationship has grown over many years, and the strength of our relationship is reflected in the overall condition of the rental property.
Real estate investment is a tried and proven path that any would-be investor should consider. The benefits are apparent, however there are a number of expected and unforeseen challenges that arise from having a real estate portfolio. Possessing a strong work ethic, financial hygiene, and mental resolve will place you in good stead to face these challenges and prosper from real estate investing.
I would love to hear from you with regards to your own real estate portfolio, and any interesting parts to your journey so far. For those of you just starting into real estate investment and have any questions, please let me know in the comments section below if I could be of any support.