Property secrets: an investor's own account

A journalist asked one investor what the "secret" had been to the portfolio he built and how he kept going through market cycles. The investor's answer, as the piece reports it, is that there is no secret, only a strategy. He says his plan came first, and that many investors do not have one. The piece is written by a property adviser, so the strategy it sets out is his own account.

The strategy he sets out moves in stages. He says he built an asset base through capital growth first, using the increasing value of his properties to provide equity for his next deposit while rental growth helped pay the mortgage. Once the base was large enough, he moved to what he calls the cash flow stage, lowering the loan-to-value ratio of the portfolio over time and then living off what he calls a "cash machine" of properties.

He writes that managing cash flow matters for staying in the investment game, though he says it is capital growth that gets an investor out of the rat race. In his view, chasing properties that return cash from the outset can leave an investor without an asset base large enough, and he describes the two stages of his plan as separate steps, one building the base and the other living off it.

He describes choosing an investment in a fixed order, which he calls a top-down approach. The first question is the stage of the economic and property cycle, then the state, then the suburb. Within the state he looks for suburbs whose values have risen strongly over long periods, and he says he checks published figures for areas where wages have grown faster than average.

For the property itself he lists six strands in his approach: one that would appeal to owner occupiers; one that sits below what he calls its intrinsic value, which is why he avoids new and off-plan properties; a high ratio of land to asset; an area with a long record of strong growth; something he calls "a twist", meaning an unusual or scarce feature; and room to manufacture capital growth through refurbishment, renovations or redevelopment. He writes that by following the approach he minimises his risks, because if one strand lets him down he has three or four others supporting the property’s performance.

The piece uses several terms through its account: capital growth, cash flow, loan-to-value ratio, and investment grade. The adviser writes that he now sets his faster-growing residential holdings alongside retail, industrial and commercial ones that bring in more cash flow but grow less in capital terms. He says he reviews how his portfolio performs at least once a year, asking himself whether he would buy each property again if it were offered today.