Creating a profitable property portfolio

of the owner and therefore unable to provide a full return on investment.
It can be a liability as it has recurring costs that always have to be met. With the crumbling of the international financial markets and uncertainty of most investment modes, investment in real estate around the world and especially here in Zimbabwe has become attractive, as it has stood the test of time.

I am going to list some of the requirements necessary for a sustainable property portfolio that will ensure returns not only for pension but also for posterity.
As one creates a property portfolio, a balance is to be made between minimising risk and maximising profit.
One may achieve such a balance by dividing the potential target properties into two categories.
On one side will be those that are of low risk offering a long-term return and on the other side those with potential of short-term return but highly risky. Low-risk properties will ensure that the portfolio is always generating income and are necessary for income projections.

Low-risk properties are fully leased commercial properties by reputable first class tenants with long-term leases.
Before one offers to purchase a low-risk property it is important to ascertain the condition of the tenant in relation to payments and property maintenance.
If the tenant is a reputable large organisation, the risk of it closing or transferring is less especially when its goodwill is linked to a particular building.The long lease guarantees the rentals and one may easily project using the figures from such a building.

High-risk investments are those that are opportunistic in nature and do not have guarantees of a return but mere projections in a utopia.
These may be dilapidated houses, properties ripe for conversions or even unoccupied commercial properties.
The purchaser has to do more than just purchase the property for it to return value.

However, it is this part of the portfolio that keeps the whole portfolio growing as quick returns ensure quick growth of portfolio.
The target areas for the portfolio are also very important, whether one intends to compress the portfolio to target one locality, country or make it international in its scope. 
Before one invests outside the areas of knowledge, it is critical to fully investigate real estate trends in those areas so one may project the return on investment and get a return when required.

The portfolio ideally should reflect a balance between established areas and those that are not fully established.
When investing in different areas especially those areas that the investor has no easy access to, or does not usually visit, then it is important to investigate the managing agent so that losses do not occur after investing, as a result of mismanagement. Diversifying to locations that do not have the same economic drivers is ideal, as one economic variable in one locality will not affect the other, in a different locality, ensuring at least one good return at all times. This method is increasingly becoming redundant as a result of globalisation.

The other method will be investing through property types. One may specialise in a certain property type that one has experience and confidence in for return.
This might be necessitated by the contemporary demand although one will also have to consider the possibility of long-term demand based on statistics available in relation to new developments, population growth and other related factors.

Diversifying property types normally reduces risk as property cycles for commercial, residential, multi-family apartments and student accommodation normally follow different trends. It is commonplace that when one area suffers, the other is in demand.  In the event that macro- economic factors affect the performance of all the portfolios at once, the tendency is that they are normally affected at different levels and the investor will not completely suffer an outright loss of income.

The larger the portfolio becomes the more complex it is to finance or manage. At this point investors should opt for profitable property management options and short- to long-term investments options.
These may include large-scale property renovations and off plan property sells.

1. Vengai Madzima is a property investment consultant and analyst with Wisdom Properties. He can be contacted on 0772 468093 email: [email protected]