For an investor, the key point to remember, at least at the very beginning, is that it's not as important to know exactly how you will achieve your financial goal as to believe that you will realize it . expect a success.
In the last 20 years, I have spoken to several hundred investors and the most successful are often not the ones who started the most, but those who were the most determined.
Success depends more on your resourcefulness and your intentions than your resources.
Now that you're in the right free space, here are some strategies and ideas you can use to grow your portfolio and generate an annual income based on the list of rents.
Use the magic of the lever
Leverage is the key to creating wealth. The more leverage you have, the more wealth you can create. It's as simple as that.
The real estate is a very wealthy asset class because it gives you a lot more leverage than other asset classes. If you have a 10% deposit, you can borrow the remaining 90%. You can even borrow the 10% deposit plus the purchase fee if you have rights to existing property.
Your ability to borrow, combined with your willingness to incur good debts, will be essential to achieving your financial goals. And if you buy a self-financed property from the first day, all the growth in equity comes back to you, without any of the costs of ownership.
So, what's the problem?
Rather than a catch, let's call it an obstacle to overcome. The reality is that if you are heavily indebted, you inevitably incur a large debt. At the stage of acquiring your strategy, it's exactly as it should be. Once you have taken into account the benefits associated with negative adjustments, your wallet is worth it, so that it does not represent a daily burden. And your properties are gradually increasing in value, just like rents. Everything is fine.
After a few years, you may have acquired six or seven properties and all your friends think you are a millionaire. However, the investor who owns this portfolio may think a little differently.
Why? Because they know that even if they receive a substantial rental income, they also have substantial expenses. Mortgages, board rates, corporate fees, property management fees, insurance, maintenance, potential tax liabilities, etc., among others.
Often, when all these expenses are recorded, the weekly net cash flow, while positive, will not even replace a modest income. They have trouble understanding how their externally impressive real estate portfolio will always bring them a lot of money.
A typical scenario of the investor
Suppose a real estate investor has acquired a property per year for 10 years. Their first property cost about $ 450,000; their last cost was $ 900,000 (see the '10 Year Acquisition Phase' chart on the back of the page). During the 10-year acquisition phase, they spent about $ 6.75 million on the property, accounting for over $ 9.3 million.
If you own a property in Sydney and another in Brisbane, there is a good chance that one of them at least will be in a cycle growth on the rise [1945]
This investor now owns 10 properties in a portfolio of more than $ 9 million. Since the investor borrowed 100% on each acquisition and made only interest payments, the balance of their mortgage is just under $ 7 million, which gives them an increase in net wealth. approximately $ 2.5 million. Do not forget that we assume that the portfolio has been self-financing since the first day.
This investor has therefore made a fortune of $ 2.5 million in 10 years, without using any of his own funds. Pretty impressive. This certainly beats the retirement pension.
But hang in there. Is passive income definitely a positive rental income, not equity? And that's where the challenge lies.
This $ 9 million portfolio, once all expenditures have been deducted from income, can generate a positive cash flow of only $ 25,000 to $ 35,000 a year, if applicable. It is not even a modest passive income, especially considering the size of the asset.
Properties tend to become more positive over time. They could therefore remain in place for years, until the cash position improves to the point of generating a reasonable income (see the "10 Year Consolidation Phase" chart on the next page). left). However, most investors would not be ready to wait that long. Is there another way to speed things up?
Think "big picture"
It is important to recognize that there is more than one way to earn income from your real estate. At the beginning of your journey, you may not know exactly how you will generate an income on your investments. In fact, at first it was not even that important. All you need to know is that the bigger your assets, the greater your future passive income will be.
So, instead of wasting time detailing how you will use your retirement assets, just focus on increasing the base of your assets as large as possible in a minimum amount of time.
To minimize risk, it's important to have a geographic spread, know the real estate cycles, and balance your cash flow. All of this must be done in the context of your risk profile. The longer you invest and the more experience you accumulate, the more likely you are to appreciate the different options available to you and to choose the one that suits you when the time comes.
During the acquisition phase, your goal is to have a national perspective. identify known growth drivers in a given market; and buy in undervalued areas that have significant growth potential.
Growth is not linear. Most doubling cycles include a growth phase of about three years, with the remaining years of the cycle being much more moderate. So you buy before the growth curve, surf the wave and reevaluate your properties at the height of the market. You then release this equity and reinvest in the next real estate market that is about to take off.
When choosing the areas to invest in, it is always prudent to review them in the context of your risk profile. If you consider yourself a low risk investor, you need to focus on the largest populations with the most diverse economies.
The growth is not linear … So you buy before the growth curve takes off, surf the wave and have your properties re-evaluated at the height
This means that your main assets should be in Sydney, Melbourne and Brisbane. There are sometimes great opportunities in large regional centers such as Geelong and the Sunshine Coast, but make sure to develop at least some exposure in each of the capitals of the east coast. This could include your own home; it does not necessarily have to be an investment property.
A few years ago, I highly recommended Sydney. In the Parramatta area, new two-bedroom apartments could be purchased for between $ 350,000 and $ 375,000. Looking back, we learn that it would have been obvious. In recent years, the value of these properties has doubled.
However, I do not like to think of all the investors who could potentially have bought but did not have the vision. They escaped competition because they were unable to identify known growth drivers and predict the evolution of the Sydney market. Or, more specifically, they were not willing to make an act of faith and be guided by a real estate expert.
All investors who have followed my recommendation have been able to release large amounts of stocks and continue to grow their portfolios. Interestingly, Sydney and Brisbane tend to be counter-cyclical. Sydney takes off first and Brisbane follows sooner or later. This historical correlation can be followed in recent decades and is quite consistent.
If you have a property in Sydney and one in Brisbane, there is a good chance that at least one of them will experience an upward growth cycle. That is why many of my investors who have made a lot of money in Sydney have unlocked this stake and are investing in the Brisbane market.
The Need to Think Differently
To summarize, during the acquisition phase, we rely on access to manufactured equity to reinvest and build our portfolio.
But when we have reached the stage of acquisition at consolidation (that is, when we stop buying), the value of our properties will continue to increase and we will continue to create significant capital every year, is not it? Absolutely.
In the previous scenario, assume that our $ 9.3 million portfolio increases capital growth at a modest average annual rate of 5%. Thus, in the first year, our net worth increased by approximately $ 450,000.
If we try to replace an earned income, for example, by $ 150,000, we will only have access to about one-third of our total increase in net wealth for that particular year.
To do this, we obviously need a borrowing capacity from the banks, but if your loan-to-value ratio (LVR) is about 50%, it should be after a about fifty years of consolidation (about 15 months). years after the purchase of your first property), this should not be a problem.
In order to minimize the risks, it is important that your geographic location be extensive, that you have a keen awareness of the asset cycle and that you balance your cash flow
Each year you only have access to about a third of your total growth to live, so your net worth always increases and your pension rate goes down. It's a very elegant solution to a very real challenge!
The alternative
The only real alternative to the above is to sell your self-financing assets, which appreciate each other. For example, you sell five of your properties and use the funds, after deducting costs, to pay the remaining four. Then you live rental income from these assets, which no longer have mortgage.
This will reduce the size of your assets by more than half, which will significantly reduce your ability to create more wealth in the future.
It will also mean that you will probably have to pay tax on a portion of your income. And let's face it, your unencumbered assets will always be subject to expenses, even when they are without mortgages.
In summary, if you invest over many years in a number of well located assets and have been the subject of much research, you will do much better than if you do nothing. It is quite possible to replace earned income with passive income over a period of time if you are targeted, strategic and flexible in your approach.
Whether you decide to keep your asset base intact and live off your own funds, or to sell some of your assets to pay off your debts, you will do so to your personal choice and to your personal situation. When the time comes, you will know what to do.
Ian Hosking Richards is an experienced real estate investor with a portfolio of more than 50 properties.
He is the founder and director of Rocket Property Group.
