How Do I Build a Property Portfolio?


You may have been studying property for a while and now want to build a portfolio, but wondering: “How do I actually plan out a property portfolio?”

That’s a great question and one that we often hear at Opes Partners.

This article is going to “pull back the curtain” and show you how a regular couple can go from owning one property to owning 4 in just 3 years.

Case Study: Introduction

Setting the Scene

Our example couple is Bill and Jean. They live in Wellington and are aged 47 and 48 respectively. They’re happily working and plan to retire in 20 years. They want to build a good passive income in retirement to supplement their savings.

They are in a good equity position. They have a home worth $600,000, with an $80,000 mortgage, with five years left on the term. This gives them purchasing power of $2 million, without having to touch their savings.

Property Portfolio 1

Now that we have a goal, resources to achieve that goal and a time horizon, we can start building a portfolio.

Case Study: Building the Portfolio

Building Bill and Jean’s Portfolio

Here’s what Bill and Jean might look to do:

  • The couple has $400K of useable equity within their owner-occupier home. This useable equity can be used as the deposit to buy investment properties.
  • This useable equity gives them purchasing power of $2,000,000 if buying brand new properties, which are exempt from the 70% LVR cap.

When beginning a property portfolio, it is usually best to start investing in properties that are likely to achieve good capital growth.

These properties may require the investor to ‘top-up’ the mortgage each week (i.e. be negatively geared), but they will go up in value more quickly.

You would typically start with capital growth properties for two reasons:

  1. you want to hold these properties for the longest time possible so you get exposure to the capital growth
  2. if the banks were to change their lending rules which prohibited you from buying additional properties in the near future, then you'll want to have the ones that are going to grow in value the fastest.

Let's look at a basic portfolio strategy:

  • Year One: invest in a brand new Auckland property for $700,000, using 100% lending (borrowing against your own home). This property is forecast to grow in value at 7% per year.
Property Portfolio 2

At this point the couple has $220,000 of mortgages secured against their home because the $140,000 deposit for the investment property is tagged against their own equity. In a moment we’ll go through how to remove that security and separate the two properties out from one another.

At this point the couple will still have purchasing power of $1.3 million. They could purchase another property straight away. However, as first-time property investors they may decide to hold off for a year, since they have time to build their portfolio.

Then over the next few years they might:

  • Year Two: invest in a second property geared for growth. They may want to diversify their risk, and buy a property for $600,000 in Hamilton, with forecast capital gain of 5% annually
  • Year Four: invest in a high yielding apartment in Wellington for $700,000. Forecast the annual house price growth at 4%. Assume it will provide enough cashflow to offset the negatively geared capital growth properties

At this stage there will be $400,000 worth of investment debt secured against their home. However, the rent from the investment properties will cover the interest payments, and the portfolio is no longer negatively geared because the apartment is covering the top-ups of the capital growth properties.

Property Portfolio 3
Case Study: Securing the Portfolio

Making their home Mortgage-Free

In this scenario, Bill and Jean have used their own home to fund the deposit for their portfolio. This works because they now have a portfolio, but there is some risk since some of the investment lending is secured against the family home.

Over time the couple will want to move that investment debt back against the investment properties.

  • By Year 5, Bill and Jean will have paid off their own personal mortgage and will only have their investment debt remaining secured against their home.
  • As the investment properties go up in value, they can refinance the lending back against their investments.
  • The way this works is:
    • Bill and Jean can borrow up to 70% of the value of their investment properties
    • As the properties go up in value, they can borrow more against those investment properties
  • Based on the growth rates mentioned above:
    • In Year 6, the Auckland property would have enough equity to move $140,000 of investment debt from the owner-occupied home against the Auckland property
    • In Year 9 the Hamilton property would have enough equity to move $120,000 of investment debt from the family home against itself
    • Then in Year 13 the same could be done for the Wellington property.
Property Portfolio 4

In actual fact, Bill and Jean could refinance away from their personal home more quickly by moving the deposit for the Wellington apartment towards the Auckland and Wellington properties, which have continued to increase in value. But, in this case let’s assume that didn’t happen.

In Year 14, their personal property would not secure any investment debt.

The couple would then have a property portfolio that has been quietly paying for itself over many years and the couple can continue to hold these properties until Year 20.

Case Study: Results

Bill and Jean's Results

  • By the time Bill and Jean get to retirement, the three investment properties would be worth a combined $5.5 million with $2 million worth of debt secured against them.
  • The couple would have just over $3.5 million worth of equity. At this point, one strategy would be to transition the portfolio to high-yielding properties earning them a ballpark net yield of 5% income annually.
  • In today's dollars (i.e. accounting for inflation), that would give them a passive income of $118,000 every year for the rest of their lives ($175,000 at the time of retirement).
Property Portfolio 5

By maintaining their investment in high yielding property Bill and Jean’s wealth would continue to increase as the properties slowly rise in value. This inflation-proofs their retirement strategy, making them set for life.