It almost sounds like a silly question. Most of us either inherited a long-owned family property or made a thoughtful decision to buy an investment property. But however we got here, is it the right property to meet you and your families needs? Does it deliver the best mix of income and capital growth for your needs? Have your needs changed since you get hold of the property? If you own multiple properties, ask these questions multiple times.
Over the last year, we’ve conducted (free of charge) over 20 Portfolio Reviews for clients who own multiple properties and most of the time, what we have actually found is that most have substantial opportunities to get to a better property investment outcome than they currently have. Often by quite a large margin.
Why? Because some have a mix of strong and poor performing properties. Some have properties which have met their needs historically but no longer do (e.g. great capital growth but they now need more passive income as they move to retirement).
Some have either no debt finance or the wrong amount or structured in the wrong way and could make much better returns with a different use of debt in their financial mix.
Some have large tax burdens and could be much better off with different properties or a different structure. Many have properties that are under-using their valuable land and would be much better investments with a renovation or redevelopment or subdivision.
Sound like you ? Not sure ? Call Evan or Antony any time to discuss and we can get together and review your portfolio free of charge and suggest ways to get a better result from your property investments.
To make this a little more real for you we’ll be detailing some examples over the next few months. Here’s the first case study of recent client work (obviously we are careful not to disclose details that would compromise our clients’ privacy, but this is real actual work we have done in the last 12 months):
- The Inheritor Family: too many old houses in too few locations.
Our clients had inherited a significant number of quality properties from family as well as making some new investments themselves. But the entire portfolio is currently generating negative cash flow despite having no interest payments as there was no debt associated.
When we reviewed the properties, most had performed solidly in terms of long-term capital growth – not brilliantly, but not badly – right about average for the suburbs they were in which were fairly good performers generally. But most were now very old houses on quite large blocks of land. This means low rents, high maintenance costs, high rates and very high land tax. As a result, they were losing money every year in cash terms although this was outweighed on paper by the increases in capital value.
When we looked at the portfolio at the individual property level, some had performed considerably better than others and some had considerably more potential to be redeveloped into a higher value use than others.
So what did we recommend:
Sell the worst performing properties and use that capital to redevelop some of the best quality land by demolishing the old houses and building townhouses. This would raise the rental income by 3 without using any new capital and reduce the overall land tax burden and maintenance costs substantially;
Investigate the potential to get a development permit on a small block of old flats in a prime location to get permission to do a much higher and larger development. Our clients weren’t in the position to have the capital or expertise to do a large scale development, but the old flats were tired and low-renting and a developer would likely pay a very significant premium for the site with a permit already attached. The costs of getting the permit would be a fraction of the added value;
Buy additional properties of different types (perhaps some small commercial or outer suburban homes) in other states – this would allow them to generate much more cash income from higher yields, get similar levels of capital growth they have now, diversify their exposure so their whole portfolio value didn’t go up and down with the Melbourne economy, and dramatically reduce their land tax bill because they would spread into multiple states;
Consider taking on some debt against their portfolio so they could buy about 50% more property. They would still have very safe levels of debt (only 1/3 of the total value) and be able to pay all the interest bill and still have additional income from the new properties, and get their “foot across” 1/3 more capital value to appreciate in value every year thus significantly increasing their long-term capital growth potential.
The value of these changes? Huge. For a portfolio that was currently in the low double-digit millions in value with negative cash flow, they could expand to a different and significantly larger portfolio with larger increases in combined income and capital growth potential.