Building a successful investment portfolio is no simple task for beginners, but six tips can help ease the process. Some of the items on this checklist may sound overly simplistic, but they are vital rules that deserve reiterations. Too many new investors think they can ignore these rules and still succeed, only to find that they would’ve been better off following tried-and-true strategies.
As you read through these six tips, remember that the application of this advice will depend significantly on the specifics of your situation. Every decision should keep your overall financial situation in mind. When in doubt, seek the advice of a qualified tax professional and investment advisor.
Set Clear Objectives for Your Investments
You need to know exactly why you’re investing and what you expect of your money. Otherwise, you are going to be like a rudderless ship at sea—no direction and no purpose. Common investment objectives include capital appreciation, capital preservation, income, and speculation. An investment portfolio that aims to achieve capital appreciation will look much different than an income portfolio, for example, and they’ll perform differently over any timeline.
If you aren't clear about your goals, you could become disappointed in your returns. You might've followed the strategy perfectly, but you pursued the wrong objective.
Minimize Investment Turnover
As the saying goes, "don't rent stocks, buy businesses." If you aren't willing to own a business for at least five years, don't even consider buying shares unless you fully understand and accept that the short-term stock market is irrational, volatile, and capricious.
Aside from the volatility, there are tax advantages to holding onto investments. The profits on long-term investments are taxed at a lower rate than short-term investments, and dividends from those investments are often taxed at a lower rate than distributions from recent additions to your portfolio.
Short-term positions are more associated with trading than investing. Trading strategies differ from investment strategies because they seek to capitalize on the short-term volatility of the stock market.
Every dollar you give up in fees, brokerage commissions, sales loads, and mutual fund expenses is a dollar that can’t compound for you. While an expense ratio of less than a percent might not seem like much, it adds up over time. By finding ways to reduce your costs early on in your investment timeline, you could end up saving hundreds, thousands, or even millions of dollars by the time you retire.
Take Advantage of Tax-Efficient Accounts
Two great investment tax shelters designed for lower and middle classes in the United States are the Roth IRA and the 401(k). Both account types have tax benefits that can make them incredibly lucrative, but there are unique rules and contribution limits that must be kept in mind. You’ll also pay a penalty tax if you withdraw money from these accounts before age 59½ (though there are exceptions to this rule).
While both retirement accounts come with tax benefits, the benefits are different. Investors need to choose an account that fits with their goals and investment style.
A 401(k) plan allows you to invest in a variety of mutual funds, and employers may offer to match your contributions to the account. Whatever you contribute is deducted from your taxable income. You'll pay taxes on the money when you withdraw it in retirement. By deferring taxes until retirement, you'll likely pay fewer taxes, since your income (and income tax rate) will likely be lower in retirement.
As far as taxes go, a Roth IRA is a kind of opposite to the 401(k) plan; money is taxed upfront, but it can be withdrawn tax-free in retirement. That means you don't pay taxes on the capital gains, dividends, or interest your money earned as it sat in the Roth IRA.
Never Overpay for an Asset
There is no getting around it—price is paramount to the returns you ultimately earn on your investment portfolio. Stock prices fluctuate in the short-term, so even a good investment can be overpriced. This is where fundamental analysis comes in handy. By researching the details of the company’s finances, you can feel more confident in paying a fair price for a stock.
On the other hand, a low price doesn’t offset an otherwise bad investment. You cannot buy a cheap stock with a low earnings yield and expect to do well unless you have reason to believe the company will grow significantly or experience a turnaround.
Another classic saying offers some investment wisdom on this issue: “don’t put all your eggs in one basket.” Nor should you put all your money in a single investment. You may have heard that you should seek out high-quality blue-chip stocks with steady dividend yields, but you don’t have to choose just one blue-chip stock. You could easily find a dozen companies with similarly beneficial characteristics.
By diversifying, you're spreading your risk across different sectors, industries, management styles, and geographic regions. When something negative happens—a company goes bankrupt or a natural disaster affects industries in a certain region—the impact will only hit a segment of your portfolio. Sure, you will feel the negative effects, but not as intensely as you would have if you had put all your money in that one company or region.
Before you buy a rental property, be sure to do the math and ensure you are guaranteed a positive cash flow.
Remember to factor in all the expenses involved in such an investment, including the mortgage payments, property management and security, if any. If the property is already profitable when you buy, then chances are you can make it even more so with improvements over time.
- Keep it occupied
The biggest cost suffered by landlords is the loss of income created by vacancies. Not only is there the loss of income, but also the cost involved in sprucing up the place and advertising it to new prospective tenants. This means you have to work hard at keeping your units fully occupied. To do this you need to look into what may be causing a high turnover for your property. Check on whether you are pricing your rent above market rates, the character of your property manager, and whatever other issues that may be influencing your tenants decisions to move out. Querying your tenants as they leave is a good idea to know what the problem is if not obvious.
- Increase rents strategically
Low rents will typically help encourage your tenants to stay put, but you cannot sustain this for long and expect a fair return on your investment. Most neighborhoods with time gradually appreciate in value, and so too will the rents in the area. In order to keep your tenants long term, but continue to enjoy an increase in your income, increase your rents slightly each year. Industry figures indicate that a 1-3% increase each year is just enough to keep your profits going up, while not upsetting your tenants. Remember that moving costs money. As long as the increment is below this cost spread over the typical lease period, then you should be fine. Also, keep in mind what other similar properties in the area are charging.
- Have expertly drafted tenancy agreements
These days, tenants have become increasingly aware of their rights, especially when they are able to band together and have access to legal help. Do not allow yourself to be on the short end of the stick when it comes to protecting your rights as a property owner. Ensure that you get help form a property lawyer on drafting a tenancy agreement. This way you can ensure the clauses included will allow you to legally raise rents when needed and allows you to penalize the tenant for late payments and breaking the agreements. There is much money to be made from collecting late fees and other penalties if you have the will to enforce the agreement. This is not meant to be a punishment for tenants, but rather a way to instill discipline. You can enjoy timely made rent payments and ensure better care of the property.
Even the most successful of property entrepreneurs have to start somewhere, but there can be so much to focus on at the beginning that you don’t know where to begin. So, to help you along, we’ve put this article together with 7 strategies for you to get you creating your own portfolio of property from a standing start.
So, without further ado, let’s get stuck in.
Strategy 1 – It’s a Bonafide Business
The first mistake that many budding property tycoons make is not treating the enterprise as a business. Whilst it might seem like fun (and it often is), your ultimate aim is to generate profit, which means that every action you take should be made with the same care and attention as if you were ‘at work’, working for a company that pays your wages.
This means putting 100% into things like market research, housing trends and creating professional networks to support you in your endeavours. What absolutely should NOT happen is that you make investments based on emotional factors or because you like the look of the house in question. All of your decisions need to be shrewd, based on the facts and not influenced by emotion attachments.
Strategy 2 – Know Your Limits
What you need to establish early on is exactly how much you’re going to need to invest of your own money and have a realistic view of what constitutes ‘overstretching’ yourself. In a modern housing market that requires significant deposits (around 25%) and a host of other legal costs, if you don’t take everything into consideration at the outset, you could be engaging in a very costly mistake.
If your maths don’t add up, the chances are, a buy to let mortgage lender is not going to offer you a mortgage anyway, as the rules they work to are much more tightly regulated than they were before 2009. Overstretching and reaching for the stars is perhaps one of the most common mistakes that property investors make that results in things going awry.
Strategy 3 – One Property At a Time
Identifying a potential property, researching the area and all the things that are involved in a house purchase, need your absolute focus, which is why at the outset at least, you should concentrate on one property at a time. Even if money was no object, it would still be foolish to move on multiple properties at the same time.
Take time, employ the appropriate amount of due diligence, work with experienced property professionals and you’re likely to enjoy a much less stressful and much more successful time of things.
Strategy 4 – Buy Low Sell High
Now, this might seem pretty obvious and of course you want to sell higher than what you buy property for, but what we’re primarily talking about here is to be aware of market conditions at any given time. Whilst there are often homes sold for less than their current market value, you have to ask yourself where the market is heading. If you’re in the midst of a housing boom, then don’t put all of your metaphorical eggs in one basket in case there’s a sudden dip in the future.
Like it or not, house prices do fluctuate, so protect yourself.
Strategy 5 – Be Good to Your Tenants
If your tenants are happy and well looked after, then they are are much more likely to stay for a much longer period of time. Empty properties offer you nothing, in fact they present you with a problem, so it’s important that you’re a good, fair landlord who doesn’t drive people away from renting. The only loser if you do, is you.
A good way to ensure that your tenants are looked after is to employ a property management agency, but be careful who you work with and that they have an ethos that matches your own.
Strategy 6 – Save, save save!
Whilst it’s great to make hay while the sun shines, the savvy property investor is someone who has half an eye on their overall financial status. A good rule of thumb is to set aside 20% of all profits, as you can soon see this figure rise considerably.
Not only does this offer you what can often be vital breathing space, but it also boosts your buying power and the level of property you are looking at improves along with your financial position. What can also help is if you were able to boost your earnings by gaining extra qualifications or a promotion.
Strategy 7 – Enhance the Value of Your Portfolio
When talking about return on investment, there is nothing quite as instant and as easy to achieve as freshening up and making your properties a) more attractive to tenants and b) more appealing to buyers. It’s amazing the difference that a fresh coat of paint and a few choice pieces of modern furniture can make to a house.
£500 worth of paint, brushes and furnishing, can add thousands to the overall value of a property or allow you to add a good percentage onto the rent you’re asking. What also needs to be said is that if you look for “fixer uppers” that maybe don’t need renovation, rather a bit of TLC, then this can represent a great opportunity to buy low and sell much higher – all for a little elbow grease.
We all have to start somewhere and there are many things to factor in to making your property ventures a success, but if you follow these basic principles, you’re going to find it that little bit easier to make your way and turn a profit.