Optimizing the performance of your property investment portfolio will be a key component for any investor looking to maximise the return on their investments.
Optimization can be done using a range of strategies depending on the type of property(s) you have and the desired outcome you are trying to achieve. The common denominator will be improved performance of the asset, be it capital growth, manufactured equity or additional income.
Historically, property has proven to be a great asset for capital growth over time and the compounding growth effects of this can be quite phenomenal. Anything you can do as an investor to assist this process will reward you well, and in most cases, the longer you hold the asset the greater the reward.
So let’s look at a few things that can be done to optimize a property. Value adding to a property is a great way to fast track the performance of a property. This could be done in many ways and include increasing the use of the property by sub-dividing the land, obtaining development approval for multiple dwellings as well as making improvements to the existing dwelling to increase its value and appeal. Quite often, any of these options can quickly increase the value of your property which will improve the compounding growth of your property as well as provide equity that can be potentially used for future investment opportunities.
As well as increasing the value of your property, optimization will also come from implementing strategies to increase the cash flow from your property(s). This can certainly be achieved by developing the property and renovating it as mentioned above, more properties on the site means more rent, and a more appealing property will most certainly result in higher rent. There are also cash flow specific strategies that investors can utilise like offering the property up on a rent to buy scheme or vendor finance contracts. These types of strategies will generate a much larger weekly return on the property but the trade off to this will be relinquishing the right to much of the capital growth in the property over time.
What was optimization for me?
Not long after purchasing my first property it became clear to me that I had a real affinity with real estate and it was going to be an asset class I would focus on and use as an investment strategy. For me it just made sense because to get started you didn’t need a huge amount of capital and the investment produced income which assisted with the costs associated with holding on to the asset. For me, the plan was to purchase as much real estate as I could sensibly afford and put in place the strategies required that would enable me to hold the assets long term and get the benefit of the capital growth over time. It was these plans that lead me to understand and implement optimization into my investing.
To execute my plan I needed both capital growth strategies as well as income strategies to make it work. Capital growth was required to create equity that I could use to purchase more property, and income was required so I could afford to hold onto the assets long term. Each property I would buy may not achieve both requirements, although in some cases it would, but the intention would be that either reasonable growth or reasonable income would result from the purchase.
The types of properties I would purchase geared more towards growth were properties I felt had great value add opportunity. These would include properties that I could renovate, properties that I could complete a sub-division on – blocks of units that I would purchase on 1 title and be able to separate into multiple titles as well as properties that I considered had great future capital growth potential. They might be properties that I considered were in growth corridors in capital cities, under-performing suburbs surrounded by performing suburbs, rural towns that I believed had bright futures and mining towns.
With regards to properties purchased geared more towards cash flow, interestingly, many of the properties I purchased for growth generated great income as well, particularly the blocks of units on 1 title, some of the rural towns and most of the properties purchased in the mining towns. The most powerful cash flow properties for me though were properties I purchased and then sold on vendor terms contracts. This was a real game changer for me because up to the time when I first learnt about this strategy I was always struggling to meet my cash flow objectives. Vendor terms contracts are a true income strategy and it couldn’t have come at a better time for me then just prior to the GFC when interest rates where rising rapidly which in turn increased the holding costs across my portfolio.
The result of implementing these varying strategies was that I was able to achieve my objective of purchasing many properties that I was able to hold onto. The goal was to build a portfolio that would financially look after itself and I am comfortable enough now to say that I have achieved that goal. Of course you have to constantly monitor the performance of each property and implement any changes accordingly to adjust for any changes in performance should they occur.
Optimization may well be different for each investor but the importance of it will be common to us all. I think when you are clear about what you want to achieve, the path you need to take to get there it a lot easier to see. Learning and understanding the various investment options is critical because it enables you to select the right strategy to achieve the outcome you are looking for.