When talking to new clients, I’m often disappointed about the lack of planning when building an investment property portfolio. Property investment is such a big commitment, and reward, that you have to treat it as a business, not a hobby. You need a long-term strategic viewpoint rather than seeing it as one property at a time.

In Australia, with the fundamentals of our property market, virtually anybody can become a successful property investor and build a great asset and income base. However, many people fail because they try to do it too quickly and take unnecessary risks, or they don’t have a proper plan and paint themselves into a corner. The key to building an investment portfolio that sets you up for a comfortable future requires discipline and patience, and can be achieved by following these three steps:

Step 1: Set Objectives and a Plan.

Unfortunately people have an objective such as ‘I want to own 10 properties in 10 years’. It may sound good but it really means nothing. Instead, take a 10-year view and set an income goal you want from your property investments. A reasonable example is to target 50% of your current earnings in 10 years’ time. If your salary is $80,000 today, set an objective of earning $40,000 after all expenses from your properties. Then test this goal to ensure it is reasonable given your current situation and doesn’t require too much risk.

Step 2: The Strategy.

After deciding on your income objective, work out what value of properties you require to generate this. For example, a reasonable mix of types of properties will get an overall return of approximately 5% p.a. from your properties after owning them for a few years. Using the $40,000 return objective therefore requires $800,000 of properties after mortgages to generate this return ($800,000 x 5%). Then, there are only three things you need to do to succeed:

1. Plan, buy and hold for the long term.

Although we talk about a 10-year plan, it effectively becomes a lifelong property investment plan with exit strategies added in for your circumstances and objectives. Each property should be purchased for a minimum of 10 years and, preferably, longer.

2. Buy right and consistently.

Focus on buying good investment properties that fit your objectives in good areas at the right price. We cannot predict the short-term direction of the property market; however, over a 10-year timeframe, you’ll likely see two to three cycles in the market. If you buy at consistent timing intervals, you’ll buy across these cycles without needing to predict or worry about short-term market direction. Here, I often recommend clients consider engaging a good buyer’s advocate, especially when starting out in property investment.

3. Get the financing structure right upfront.

Structure the finance to fit your long-term plan and don’t take a one-property-at-a-time view.

Sometimes this might mean you don’t always get the cheapest interest rate as lender diversification and product features may be more important to facilitate the plan. However, you also won’t get stuck like the 90% of investors who only have one or two investment properties. This often happens because they run into debt servicing constraints because the loans have not been set up properly.

Step 3: Ongoing progress review.

It’s really important to review progress with your advisers. Schedule a review every six months to ensure the strategy is on track, and to adjust for any changes in circumstances. Consider revaluing the portfolio revalued to free up more equity and continue the plan.

If you treat your investment strategy with the importance it deserves and stick to it, you’ll be well rewarded down the track. As long as you have a solid plan then there is no need to try to ‘time’ the market. Nobody really knows where it is going next and trying to do this can be very expensive. Just buy consistently according to your plan and reap the financial rewards in the long term.

Tim Boyle from Finalytics Financial is a chartered accountant, mortgage credit adviser and active property investor. He has over 20 years’ experience in finance, accounting and consulting, and specialises in property finance. Visit www.finfin.com.au or email tim.boyle@finfin.com.au