How the right property strategy can help you retire with peace of mind
If the pandemic has taught us anything, it’s that we need to have a backup plan in place when it comes to our financial situation. In the early days of the lockdowns, people were unable to work and just how financially vulnerable most people are was laid bare for all to see.
While this might have been exceptional circumstances, what we do know is that 56 per cent of Australians do not have enough money to retire. For most people, retirement is not a shock. We know it’s coming and approximately when. The issue is that people simply don’t put enough focus on it early enough and end up without enough money put away.
For that reason, it might be worth looking at an asset like property to help accelerate your journey to financial security. Here’s how.
Invest wisely
The most important realisation that most people need to make is that trading time for money is not going to get you where you need to go. While saving diligently and sticking to a budget are critical components of wealth building, ultimately it’s where you put that money to work which is the most critical element. The traditional retirement model involves putting away a portion of your weekly income and investing that into a balanced portfolio of stocks and bonds through a superannuation fund.
While this is a good thing to do and we know that stocks, in particular, have increased in value over time, it’s missing one of the most powerful elements that can really help your investments grow - that’s leverage.
The great thing about property is that you can typically put down a relatively small amount of money and control a much larger asset. Typically that would be a 10-20 per cent deposit not including other costs such as stamp duty and closing costs.
What this effectively does is increase the return on your money thanks to the power of leverage. While a stock portfolio might increase in value over time, you still have to invest 100 per cent of the funds.
By using debt in an intelligent way, you’re able to borrow from the banks to help accelerate your wealth building. For example, if your property increases in value by 5 per cent and you put down a 20 per cent deposit, your cash has actually grown by 25 per cent.
Strategy is key
You don’t typically go out and try to purchase one property and then retire. For most average income earners, this is going to be a process that takes place over time.
It’s vital that you look to invest in property in the correct way with a strategy that is going to allow you to reach your financial goals over time.
In the early stages of building your portfolio, you are doing everything in your power to acquire properties. This will involve both working and saving to help fund the early deposits and you’ll also be working within the limitations of what a bank will allow you to borrow.
Depending on how risk-averse you might be, you will look to purchase properties more or less aggressively. During this stage, you will normally be buying multiple lower-priced properties to capitalise on the higher yields combined with growth.
You are able to use the increased equity from your early purchases to continue to buy more properties and expand your portfolio. During this stage, getting the overall balance right between growth and cash flow is critical as you will need capital growth to continue buying and enough rental income to be able to maintain your serviceability and pay the costs of holding the properties. Having a diversified portfolio spread across the country also helps to reduce risk and can improve the odds of growth.
Once you’ve built up a solid base of properties and you’ve seen your portfolio appreciate in value to where you’ve hit your goal, you can then begin the process of deleveraging and paying down your outstanding debt by selling some of the properties in the portfolio.
Why most people fail
The main reason 90 per cent of property investors fail to build a property portfolio that is able to provide a passive income that they can live off, is because they undertook the wrong strategy to begin with.
Most people are typically able to purchase 1-2 properties before they run into borrowing capacity issues or a lack of capital growth. This keeps them stuck at this level unless they can increase their income - which was the very issue they were trying to avoid in the first place.
Serious property investors treat property as a business and do not just purchase any old property and hope for the best. They build out a detailed plan about how they are going to reach their financial goals and what the steps are they are required to take.
Additionally, they target certain locations that provide a combination of strong growth potential and cash flow and build a portfolio that always considers both factors.
They also don’t do everything by themselves. They look to surround themselves with a team of professionals who can help them in all areas of their journey. This normally includes a mortgage broker, lawyer, accountant, financial advisor and buyers agent.
If you’re going to be one of the 1 per cent of people who are able to retire financially free thanks to property - you can.
You simply need to forget about speculating on property and start treating it like a business and work with a strategy that is going to get you there.
Rasti Vaibhav is the author of The Property Wealth Blueprint (RRP $39.95) and CEO of Get RARE Properties, a bespoke independent buyers’ agency that has been helping hundreds of clients across Australia secure their financial freedom through property. For more information visit www.getrare.com.au
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