How to build a property portfolio to fund your retirement
Imagine retiring on an annual income of $100,000 from a portfolio of investment properties. If you think that this is nothing but a dream, join any one of property investment groups on facebook and you’ll discover that it’s a dream thousands of Australians have.
Good news, it’s is possible, however, approximately only 5% of property investors will successfully fund their retirement with income generated by their investment properties. To help you determine if it’s possible for you, here are some investment basics you must consider and understand.
Current situation
To start, you need to undertake an assessment of your current situation, including of your assets, liabilities, income, living expenses, surplus income each month, goals, risk appetite and risk profile. Engage a trusted financial advisor if you need help.
Your self-assessment should be done in conjunction with your borrowing capacity calculation. For a basic you can use this calculator or get loansHub to compare your capacity with 40 different lenders without any negative impact to your credit score.
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End position
Your goal as an investor is very important; without an income goal, there is nothing to aim for and there is no clear motivation to what may be necessary to get on track to achieve a better outcome in the future than otherwise might be the case.
These fundamental elements serve to form the foundation for a tailored plan. It’s crucial that an investor purchases all of their properties so that the properties compliment and correlate to their circumstances at the time of purchase, borrowing capacity, living expenses, available surplus income, risk appetite and profile as well as their future income goal.
Why having an income goal, rather than just a goal like, “own 3-5 properties” is better? In retirement, it doesn’t matter how many properties you’ll have, what actually really matters is the income the properties you own provide for you to live off.
The number of properties needing to be purchased should correlate with the desired income, as well as of course correlating with their lifestyle. Remember, one should not put themselves into a position of risking being a slave to their debt.
An investor ensure you can afford principal and interest repayments, because you need to reduce the debt against your investments in order to actually draw significant income from them and not perpetually servicing a never decreasing debt.
It is the ideal strategy around the acquisition phase, the holding phase, and the exit phase of a plan.
Avoid focusing on future capital growth and having negatively geared property at acquisition as this approach risks you becoming slave to the cost of debt of your portfolio, and having to keep working just to make repayments to feed the negatively geared nature of a capital-growth-focused portfolio.
Don’t just focus on positive cash flow either, as these properties will likely achieve less capital growth over time and, therefore, less wealth in the future. Holding properties void of “growing equity” meanings not being able to leverage these properties for future purchases.
How to achieve your goal
Ultimately, there are several ingredients that go into the recipe of a successful plan to reach your income goal. These consist of:
borrowing capacity
market research
sourcing the right property in the right location and negotiation, overlayed by the acquisition phase of a plan (when each property is purchased)
the holding period of a plan (having enough time for the plan to succeed)
the exit phase of the plan
On the last point, there are a couple of worthy exit strategies, including sell some properties and pay off the debt on the rest, reduce your debt, assisted by an offset account and principal and interest (P&I) repayments on the mortgage against your principal place of residence (PPR) then on debt against your investment property or if you can afford it, have principal and interest repayments on as much debt as possible.
Finally, understand the importance of thorough research, and if you don’t have time, then engage a professional to write a tailored plan, which provides a balance between affording the debt now, being able to afford a lifestyle and not being a slave to the debt you have.
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This article does not constitute advice; readers should seek independent and personalised counsel from a trusted adviser that specialises in property, a tax accountant and property design specialist.