Let’s start off with a bit of a reality check: 99% of investors who start out investing in property to secure financial freedom for themselves and their families will never achieve the results they want. It is a sad fact but unfortunately true.
The primary reason that most people fail is that they buy a property and hope that it goes up in value, a.k.a. They have no strategy and they have no plan.
This month we have been focusing a lot on strategy and I want to share three things that you MUST consider as part of your property investment strategy.
1. HOW MANY PROPERTIES DO I REALLY NEED?
A lot of would-be investors get caught up in the romantic idea of owning 10 or 20 properties. Why own lots of properties if they aren’t giving you the results you want?
Owning 10 or more properties is a lot of work! Most people are better off owning 4-5 good quality, debt free properties that are diversified across major metro areas in great locations that will provide $100,000 passive income without all the stress.
Instead of how many properties do you need, ask, “What value of net assets do I need to create this income?” Coming back to Paul and Anna, we are working to replace an income of $81,000/year net cash flow. In order to the answer the question above, we need to work it out using the $81,000 income goal and an average rental yield for the portfolio. 5% gross yield is typical of capital city locations, so now let’s calculate the costs.
2. THE COST OF INVESTING IN PROPERTY
For each property owned outright, there is approximately $5,000 in costs per year for council rates, body corporate (if a unit) and property management fees. The average price of the properties in an investment portfolio is $500,000. Therefore, we factor these costs over the property value:
($5,000 / $500,000) x 100 = 1%
If we take this 1% from the 5% gross yield, we have a net yield of 4% of the value of the property.
4% of $500,000 = $20,000 p.a. rental income or $384.61 p.w. per property.
Now reverse engineer the goal of $81,000 income per year:
$81,000 income / 4% net yield = $2,025,000 of property owned outright.
This is the value of net investment assets you need to own outright, renting at a 4% net rental yield.
3.THERE ARE THREE PHASES OF YOUR PROPERTY JOURNEY
Property investors experience three distinct phases in their portfolio:
- Acquisition – Accumulating properties to build leverage in the market.
- Consolidation – Debt reduction phase.
- Lifestyle – Funding lifestyle through property portfolios.
The main things to focus on at the beginning of every journey are:
- Continually growing the capital base (cash and/or equity)
- Supporting serviceability and day-to-day cash flow to stay in favour with the banks for lending purposes
- Legally reducing tax to reinvest that cash to compound the portfolio
- Organically reducing debt through the use of offset accounts
Always remember that property investment is not a “get rich quick”. Sure, you can flip properties but that comes with a lot of risk. We always recommend you buy and hold and develop a strategy with the long-term in mind.
If you need help fleshing out your strategy or are stuck somewhere along the way, join us at a free 2-hour Property Investor Night at a main centre near you. You’ll have the opportunity to book an obligation-free meeting with one of our expert coaches to discuss your long-term wealth plans.
Sue Irons
Director
Positive Real Estate NZ