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Market dwindles: The blueprint for a stronger property portfolio
As market conditions shift, investors are being forced to rethink what makes a property portfolio strong, from managing cash flow and risk to making sure each asset has a clear role.
With the property market constantly shifting, building a strong portfolio has become more challenging, with less room for investors to get their decisions wrong.
According to Right Property Group co-owners Victor and Reshmi Kumar, a strong portfolio not only delivers growth but also protects investors’ equity when the market slows.
“It really comes down to not having the equity eroding away too fast in a slowing market,” Victor Kumar told SPI.
He said buyers should consider where a property sits in the market before buying, with investor-driven areas more exposed when conditions slow than areas with stronger owner-occupier demand.
He said Logan’s townhouse market was a good example: standard two-bedroom properties were selling for around $650,000 before the budget announcement and renting for around $410 to $430 a week, but are now struggling to achieve $540,000 to $580,000.
“So the reason for that is that area, that market is largely investor-driven, and it’s not as high an owner-occupier area. So that has taken a hit.”
Similarly, before buying another asset, Reshmi Kumar said investors need to ensure they can hold the portfolio they have built without sacrificing their lifestyle.
“A strong portfolio that allows you to handle the uncertainties with comfort, not redlining and not putting any unnecessary financial stress.”
Ultimately, the couple said portfolios needed to fit investors’ lives and varied from one individual to another depending on cash flow, risk tolerance and goals.
Cash flow to leave room to move
According to the Kumars, negative cash flow needed to remain within an investor’s personal tolerance, rather than being assessed separately from the rest of their life.
“A strong portfolio is having the negative cash flow within the tolerance limit for you personally,” Victor said.
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He said changes to employment, family circumstances, and other demands on household cash flow could affect how comfortably an investor could continue holding their properties.
To ensure a comfortable portfolio growth, Reshmi said investors needed to regularly reassess their financial position before deciding whether to buy another property.
She said that cash flow, borrowing capacity and buffers will help determine whether investors could withstand uncertain conditions.
“Firstly, they should know where they stand in terms of the cash flow, borrowing capacity and buffers to ride the uncertain times.”
She said investors should first examine whether their existing properties were serving their intended purpose before committing to another purchase.
“The approach should be to look at what you currently have and whether it is serving its purposes.”
Reshmi said investors could then consider options such as increasing rent, renovating to lift rental income, adding a dwelling, or restructuring debt, depending on the needs of the existing portfolio.
“Being ready is the key in today’s market.”
Growth needed to be balanced with liquidity
While growth remained an important part of portfolio building, Victor said investors also needed to consider what to do with their assets if their circumstances changed.
“The growth will come back in again, but it’s the liquidity.”
He said liquidity needed to be considered at several levels, including the ability to generate rental income, sell without taking a major loss, and access multiple lenders willing to finance the property.
Victor also warned investors against buying properties with a limited pool of potential lenders, pointing to studios below 30 square metres as an example, as very few lenders would consider them.
Borrowing levels also factored into the risk assessment, with Victor arguing against automatically pushing lending as high as possible when building a portfolio.
“Ideally, you should keep it at the 80per cent mark so that it does give you the opportunity to spin away to a different lender if things get really hard and push it up to that 90per cent, provided you’ve still got the borrowing capacity as well.”
Each property needed a role
According to Victor, investors should have a “pod system”, where each property has a specific role in the portfolio, rather than every asset being expected to deliver the same outcome.
“I have a concept called a pod system, not an acronym. It’s pod as in peas in a pod or a silo.”
Under the approach, he said that one property could be selected for growth, another for cash flow and another because it could be paid down more easily.
“The cash-flow property could involve a granny flat or commercial property, while another asset could have a lower purchase price that made it easier to pay down.”
While each property should have a specific role, Victor said the common thread remained buying in owner-occupier-heavy areas rather than investor-driven markets.
Similarly, Reshmi said diversification did not necessarily mean spreading a portfolio across different locations or property types.
She said that investors could diversify different aspects of their position without weakening the portfolio as a whole.
“There are many aspects of your portfolio that can be diversified; however, be mindful that over diversification can lead to the dilution of the portfolio’s position.”
Equity needed to create flexibility
While having equity available could make it tempting to keep expanding a portfolio, Victor warned investors against buying another property simply because they could.
“Being a bit too gung-ho, being in a position where you’re drawing down all the equity and buying a property for the sake of buying, it still needs to make sense in the portfolio and in your life.”
Similarly, Reshmi said investors should avoid using their entire equity position and retain funds as a buffer, particularly when equity was being used as a deposit.
“Don’t go and buy just any property and don’t use all of it; keep aside for buffer.”
She also warned against cross-securitising properties, with equity used as a deposit kept clear and separate from the rest of the loan.
Additionally, Reshmi said building a portfolio required a plan for managing the debt created by each purchase, rather than focusing only on securing the next property.
“And you need to still take into account that there needs to be a formal plan, a purchase plan, and then also a debt retirement plan in the portfolio.”
For investors starting from scratch, the Kumars said the focus should have remained on the fundamentals rather than building a strategy around tax changes.
“Tax should not be the reason to invest; stick to fundamentals,” she said.
Reshmi said investors needed to understand their numbers and goals, remain realistic about their timeframe and know where their buffer sat when circumstances changed.
Similarly, Victor said investors starting today needed to consider their total exposure, actual negative cash flow and what they could afford to hold.
“And it may mean that you’re actually starting off with a townhouse or a villa which has got lesser holding cost.”
He also said a house could provide an opportunity to add value or another dwelling, potentially helping reduce the negative cash flow of the portfolio.
The result was a portfolio built around affordability, liquidity and clearly defined roles, rather than simply accumulating as many properties as possible.
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