It's a universal truth that everyone wants a secure future to be able to comfortably live their golden years. In our youth, we study in order to be able to obtain excellent positions in the job market. Second, as active professionals, we strive to build a chasm that will allow us to live comfortably and prepare for emergencies as we retire from our professional lives.
"As a general rule, people should expect between 70% and 80% of their pre-retirement income after retirement to maintain the same standard of living they were used to," says Laura Menschik, Director. of WLM Financial Services Pty Limited
"If they want to travel more often to retirement, the cost must be added to the budget for the planned years, for example $ 10,000 every two years. In addition, an allowance for the upgrade of a motor vehicle should be added; if $ 10,000 is needed to upgrade a car every few years, you will need to provide an additional $ 2,000 per year in their budget. "
It can be difficult to save at this level of income if you work a typical day job, especially for families. As a result, many are looking to invest in real estate in order to increase their finances through a passive income stream. Other popular methods of generating retirement income include superannuation, index funds, interest on term deposits, stock dividends and distributions of trust fund units or managed funds.
For ordinary Australians, living on rental income from a real estate portfolio is a particularly attractive option. A good portfolio can be built with proper research and advice, and the income generated can be maintained for a long time, while maintaining the underlying asset.
In fact, many successful examples of typical middle-class employees have been so successful in investing that they are able to retire early from nine to five jobs and earn a living or a job. spend their days traveling. style. But how to get to this stage of financial independence through real estate investing?
"Most real estate investors do not have a comprehensive strategy. The most common misconception is to simply buy as much goods as possible and that all will end up "
How much income do you need?
The Australian Association of Superannuation Funds (ASFA) offers an updated pension standard every year to help determine an annual budget sufficient to live without active income. This standard is regularly updated to take into account factors such as inflation and details the likely expenditures that individuals and couples should budget.
"For Australians wishing to retire at age 60, the average balance of a man is $ 292,510 and that of women $ 138,154. Between ages 60 and 64, with a minimum drawdown rate of 4%, a couple's super combined retirement income would be about $ 17,226, "says Dominic Aarsen, CEO of MakeTheMostOfYourMoney.
"From 65 to 74 years, the deduction rate increases to 5%, which corresponds to a combined pension income of $ 21,533." The estimated budget to allow singles to live comfortably is about 40,000 dollars per year, according to ASFA, while for couples without children, it is about $ 60,000.
Although this takes into account the usual needs, it does not take into account the luxury you usually want to experience when you retire, such as traveling, eating out, going to hobbies, or maybe renovating your home. emergencies such as illnesses or accidents, which can absorb a large portion of your savings in a very short time. It's there that investing in real estate can help you considerably.
"With an investment property in addition to your super balance, an average weekly rent of $ 500 would add about $ 26,000 to your annual retirement income. Combining the minimum withdrawal of $ 17,226 from the pension with $ 26,000 from your rental property, you get an annual income of $ 43,266, "said Aarsen.
"Your retirement income can also increase significantly depending on your entitlement to the old-age pension or the partial old-age pension, which can reach $ 36,301 a year. A single investment property could be the difference between living a moderate or comfortable retirement. "
Effective retirement planning is a process that should begin early. Most Australian retirees work with annual incomes between $ 60,000 and $ 80,000, which does not leave much money to save for retirement.
"At the very least, for average earnings, your goal should be to replace your retirement income with your combination of retirement pension and other potential investments, such as equities, managed funds or assets" said Ben Kingsley, managing director of Empower Wealth.
"There are different prices that you can enter the market. Your job is to find the best sites with the best returns "
"Those who turn off the light by generating more than $ 100,000 in passive retirement income would more than likely have been disciplined with their money, invested wisely and, most often, starting their journey earlier than planned."
This journey begins with determining what you will need in retirement based on your personal circumstances and lifestyle. The ASFA standard is a good measure of what a typical individual or couple will need, but in the end, the best way to find out how much you should have in retirement is to consider your own situation. "I would recommend that each investor review their own annual expenses to determine how much they would need to live because they really differ from one person to the next," says Joshua Dalton, director of Dalton Financial Planning.
In this case, it is wise to consult a financial advisor who can look closely at your expenses and earnings and tell you where you are before you embark on the investment path.
How to generate an income at retirement
When you clearly know where you are and where you should be when you reach the retirement age, the next step is to determine what you need to do to make that kind of income happen.
"Most real estate investors do not have a global strategy. The most common misconception is to simply buy as much goods as possible and that everything will eventually work out. This thinking is normally based on past successes of other investors, but I think people need to be more selective about ownership in today's market, "said Dalton.
This state of mind can cause those with funds to make misguided purchase decisions because they have the means to act but not education nor a strategy. clear.
Many also mistakenly believe that investing is only for "the rich," which Kingsley argues is wrong.
"Contrary to popular belief and many misconceptions, it is not necessary to have a significant income to invest in property; you can look for properties that offer a good balance between rental income and capital growth, "he said. It highlights four "levers" that investors can use to create wealth through real estate investing: revenues, expenses, time and goals.
Income. is the starting point for all this because it determines the amount of the loan you can get. Of course, this also determines the amount of your net profit after expense recognition.
Expenditures are the theme of the struggle of many investors and aspiring investors, especially in the culture of instant gratification in which the temptation is to live – and spend – in the present moment . You must be able to reconcile your ability to live comfortably today and your budget enough to live comfortably tomorrow.
The time is your deadline: when you want to free yourself from the typical rat race. Although most of us want to stop working as soon as possible, the feasibility of this process varies, so you need to define your own investment schedule based on your income levels and habits. consumption. Your calendar helps you refine your target, which ultimately determines the type of portfolio you build.
Target – or your goal – is the most crucial aspect of investing, whether you're going to retire early or not. "If your goal is only to have a comfortable retirement income – no investor will target a normal or basic life at retirement – then the time to reach that goal could be early retirement. Hence the use of levers, "says Kingsley.
"If you want a larger wealth base and a passive income in retirement, you may have to extend the time period until, say, 65 years. You must be diligent in dealing with each expense item, based on essential expenses and discretionary expenses, to trap as much as possible and then put it to work as soon as possible. "
With this in mind, you can start developing the right strategy for your investment portfolio.
"Once you know the surplus you have and the loans you can get, you have to start looking for the best property you can. If you have a large surplus, you can focus on capital growth properties, as they traditionally have lower rental returns and, as a result, your own money can cover the shortfall. " he declared.
"If you have less surplus, the pendulum swings in the opposite direction to chase the high-yield cash-flow-like properties – just make sure they do not have any cash flow either." high holding costs! "As a rule, most investors in the middle, with a surplus that is neither particularly high nor particularly low. For example, Kingsley recommends creating a balanced real estate portfolio of investments that yield an "average" return, but with long-term growth potential.
How many properties will you take there?
You have chosen the right investment strategy and you are working on building a portfolio. You know that it's not just about buying as many properties as you can afford. But how much do you really need to take this beautiful full-bodied retirement?
The answer lies in the return on your investments, in the short and long term.
"Different locations and properties can generate different returns. Throughout Australia, you can enter the market at different prices. Your job is to find the best locations with the best returns. And you do not need 10 or 20 properties – two to five very good ones do all the work necessary to reach your financial goals, "says Kingsley.
"However, about 72% of all real estate investors own only one property. This should give you an idea that few people are looking for a good return. For most people, a portfolio worth about $ 2 million represents the best choice – in keeping with their personal risk profile, their investment. chronology and objectives.
Your portfolio could consist of four real estate assets worth $ 500,000 each, two assets of $ 1 million each, or even six assets worth $ 350,000. dollars. The key is to reduce it to the precise figure you need and work backwards.
"Start with your consumption habits, then calculate the cash flows generated by each property by adding the CPI because the living expenses will increase each year. This will help you determine the magic number and the number of properties required, "said Todd Hunter, WHERE group director.
"There are also various strategies that could help investors get ahead of the game, such as renovation, rollover, subdivision, investment in overseas properties, and significantly lower purchases. the market value. "
Dalton also suggests that investors consider placing their properties under their SMSF, which could help them avoid paying taxes in the long run.
"Once you have determined the amount necessary to cover your annual living expenses, you must increase this amount of the tax. The tax would depend on the ownership of your properties, but ideally, the income should be shared between a couple, "he said.
"Investors would benefit from real estate owned by Super, where income could be tax-free once you reach the age of retention – 60 years for most people. You can also buy a property with greater potential for capital gain, and then resell it to buy higher yielding investments. these are normally commercial properties, residential units and townhouses. "
By focusing on the numbers, investors can make more informed decisions than emotional when it comes to buying the right kind of property for their portfolios.
How realistic should your expectations be?
When it comes to investing, a lot of things are a lot easier to say than what to do. So without a holistic view of the hard work needed for rental revenues to slip, you could end up making potentially costly mistakes that stretch the path to retirement.
One of the mistakes that investors often make, Hunter said, is "to define investment loans only for interest, and then to pay only interest."
"The fastest way to go forward is to pay off the debt. Combining this with increasing your rents where you can, plus capital growth, is the fastest way to create stocks in your portfolio, "he says.
"All the properties you own are not going to be successful; every investor with a portfolio has properties that work better than others. Sell ​​bad investments and invest again. "
However, when it comes to debt, Menschik has met investors who have an optimistic view of their financial situation and who do not quite fit the reality.
"They think their debt will be repaid faster than they are able to repay; that the property will always be rented; that the value will always increase; that maintenance costs will be easily managed; and that it will be easy to sell if they need money quickly, "she said. & # 39;
"Investors should plan early, set goals, make sure their needs are covered, and save regularly. Invest in what you understand and / or seek professional advice throughout the process. Follow your plan, but review it and revise it regularly. "
Indeed, the perception "get rich quick" is a misconception that many investors are prey. "It is the one that causes the most damage to future retirement. Do not look for a miracle solution, because maybe 1% of people succeed. That leaves the remaining 99% of the pocket, "says Kingsley.
"The vast majority of people around the world have succeeded in establishing financial peace slowly and steadily, learning the process, educating and improving along the way."
Real estate investing is a long game, so it's important to plan with future changes in mind, for example if you want to start a family in the next few years.
You must also make sure that your emergency fund allows you to save considerable sums, enough to allow you to carry out your project for six to twelve months in the event of a sudden disaster. If you have less than six months of funds to cover your basic housing and food needs, you may have problems.
In addition, your loans may be of interest only to principal and interest, and you must be financially prepared to have the effect on your cash flow. "Ultimately, planning decisions – compromises between the present and the present and your future – as well as your real estate strategy in terms of content to buy and your ability to buy well will determine the outcome of your retirement. to come, "says Kingsley.
"If real estate investing was easy, everyone would do it and everyone would do it well. But these are tailor-made approaches for each individual or household, as opposed to a single strategy. Real estate investing is a science of investing; it's a process of elimination. "
