Keys to building a strong, successful investment property portfolio

While the journey requires a significant upfront commitment and some risk, careful planning and informed decisions can set you up for success. So, how can first-time property investors take the first step toward building a fruitful portfolio? Here’s what you need to know. 

3 early lessons for property investors

1. Keep your goals in mind

“The most important thing is to know what you're trying to achieve” Aus Property Professionals founder and managing director Lloyd Edge told Your Mortgage.

“What is the purpose of [having a property portfolio]? Some people might be looking for some kind of financial freedom in the future. Do they have a family and want to be able to pay to put the kids through school? Or want to pay for family holidays? For some, it might be to retire or drop to one income, and they might use cash flow from the portfolio to achieve that.

“Having those goals and an understanding of what it is they're trying to achieve is really important, because that can be reflected in the type of property they buy.”

See also: The pros and cons of buying an investment property

2. Get educated and branch out

It’s important that any property investor understands the property market, and there are plenty of resources out there to help you learn the ins and outs.

Most first-time investors stick to areas they know, Mr Edge said. While this approach has merit, your local market may not offer the best opportunities for capital growth or rental yield.

See also: Suburbs with the highest rental yields

“What I find is, once you’re educated on the market, it doesn't matter where a property is.

“Once you learn what makes a market tick, what infrastructure is there, the demographics, population, jobs, growth, everything else, you end up knowing that area better than the area you live in.” 

If you're unsure where to invest or lack time for research, consider engaging a property investment advisor or buyer’s agent. Expert guidance can help you identify high-potential opportunities across various markets.

3. Understand your financial position

As the saying goes, ‘failing to plan is planning to fail’ Before making your first purchase, take stock of your financial position:

• Risk tolerance: How much risk can you handle, given interest rate fluctuations and market volatility?

• Goals: Are you seeking passive income, capital growth, or financial independence?

• Budget: Calculate your upfront costs (deposit, stamp duty, legal fees) and consult a lender or broker to understand how much you can borrow though an investment home loan.

4. Property is generally a long term investment

Property is not a quick-win investment. Short-term strategies can be risky and require substantial capital gains to offset high transaction costs, like stamp duty and legal fees.

Successful property investors often take a long-term view, allowing time to recoup initial costs and build equity. Patience is often key to maximising returns. 

How to develop an investment strategy for a property portfolio

Once you’ve established your investing psyche, you’ll find yourself in a better position to put pen to paper and decide where and what you’ll invest in. Again, if you’re unsure or lack confidence in your investment decisions, it may be worth reaching out for professional advice. Major considerations include:

What you’ll purchase first

Your first property might be an affordable unit, a house with growth potential, or even a new build. Consider which option aligns best with your budget and goals.

How often you’ll add to your portfolio

If your goal is a specific level of passive income or a retirement nest egg, plan how frequently you’ll acquire new properties to meet your target.

How you’ll ensure diversity in your portfolio

Diversification is perhaps the most effective way to mitigate risk within your portfolio – property or otherwise. 

“It’s important to diversify by location for a number of reasons, as markets move differently,” Mr Edge said.
“And also, if you buy in different states, you can avoid paying too much land tax and the like.” 

Consider buying a variety of properties across different areas or complementing your portfolio with other investment vehicles like shares or managed funds.

How long you expect to hold each property for

Property markets move in cycles. Strategic buying and selling – such as purchasing during market lows and selling at highs – can accelerate portfolio growth.

The returns you’re aiming to achieve

Hand-in-hand with your planned buy and sell period is your ideal return. If you’re looking for passive income, you might set a target rental yield and only buy properties capable of meeting it or if capital gains are your cup of tea, you’ll want to focus on properties capable of growing by your ideal value.

Whether you’re best suited to positive or negative gearing

Understanding the tax implications and cash flow impact of your investment strategy is crucial.

• Positive gearing occurs when your rental income exceeds your property expenses, providing immediate positive cash flow. It’s ideal for investors seeking consistent income but typically results in a higher tax bill, as the surplus is taxable.

• Negative gearing occurs when your property expenses exceed your rental income, creating a loss. In Australia, this loss can often be offset against your taxable income, reducing your tax liability while you (hopefully) realise capital gains. Most property purchases are initially negatively geared, as it takes time for rents to grow enough to cover holding costs.

How to research the property market to build an investment portfolio

Proper research is critical when building an investment property portfolio in Australia. An investor (or their advisors) should understand the fundamentals of analysing a market, choosing an investment property, and assessing local dynamics and broader economic factors. Here’s a breakdown of some essential elements investors should consider when house hunting:

Market trends

Stay updated on property cycles, vacancy rates, and capital growth projections. These will differ across the country, so it can be time consuming to be across it all. That’s where professional help can be invaluable.

While Mr Edge believes property investors can “definitely go it alone”, seeking professional advice can save days, weeks, and months of work.

“There's certainly a place for property advisors, particularly for people who are time poor, don't have the knowledge, or the confidence,” Mr Edge said.

“One of the biggest things, though, is education – I don't think you should just get out there and start buying property, you need to invest in your education.”

After that, and once you’ve identified a market you’d like to invest in, you’ll spend hours getting to know agents, attending open homes, and watching the market’s moves. 

“You need to spend months in order to understand what the market's doing before you can make confident offers on property,” Mr Edge said.

“That's why it's often better to seek advice or get someone to do it for you, because they negotiate on properties every day.”

Location analysis 

You might have heard investors talk about the ‘fundamentals’ of real estate or the stock market. They’re likely chatting about measures that can indicate demand in an area will grow or remain steady. Fundamentals that can indicate capital gains or rental price growth potential include:

• Population growth
  Areas with growing populations are likely to experience increased housing demand, thereby driving rents and house prices higher.

• Infrastructure development
  Proximity to new infrastructure projects (transport links, schools, hospitals, or retail hubs, for example) can boost property values over time.

• Employment opportunities
  Areas with diverse and growing job markets tend to attract renters and buyers, who can drive demand and thereby prices.

• Vacancy rates
  Low vacancy rates indicate strong rental demand while high vacancy rates could signal oversupply.

• Lifestyle appeal
  Locations with desirable amenities like parks, cafes, and cultural attractions often experience higher demand.

Property types 

Different property types suit different investment goals, so understanding what works best for your portfolio is crucial. Consider the following:

• Houses vs. units
  Houses often have higher potential for capital growth due to the land value, while units can provide higher rental yields due to affordability and demand in urban areas.

• New builds vs. established properties
  New builds may offer tax benefits such as depreciation claims but can come with higher purchase prices. Established properties might require renovations but could offer better entry prices and immediate rental income.

• Location-specific demand
  In urban areas, apartments near transport hubs and amenities are often in high demand. In regional areas, houses with larger blocks of land may be more appealing.

“Less than 5% of properties on the market are ‘investment grade’,” Mr Edge said.

“For me, that’s property that’s outperformed the average, that's located in a quiet street, preferably in a good school catchment zone.

“Check the flood zoning, stay away from bushfire zones, and also check the infrastructure and government spending going into the market, and the days on market.

“Generally, rental yield is quite important, because having the serviceability to buy your next property and keep building your portfolio is often dependent on getting good cash flow from your first property.”

Whether you're considering buying you first, second, or fifth investment property, we've compiled some of the most competitive investment home loans on the market right now:

Important Information and Comparison Rate Warning

^{This article was first published in May 2010 and updated by Gerv Tacadena in 2022. Last updated by Brooke Cooper in 2024.}

^{Image by Nathan Hurst on Unsplash.}