Like any successful project, your property investment journey should always start with the end in mind. Are you supplementing or replacing your income? Is it a stepping stone to owning your dream family home? Is it part of your broader, diversified self-managed super fund strategy? Whatever you’re hoping to achieve, there needs to be a clear and defined goal and an appropriately mapped strategy to get there.
Many investors start with a vague idea of an objective – ‘I want more money’. That’s great! When? How much money? For what purpose? They may also restrict their options by buying near or where they live because of convenience – this isn’t always the best route to reaching your financial goals. In this article, I will break down how you can set achievable goals and a matching property investment strategy.
Let’s start with defining your success metrics. Your goals should always be SMART ones. Specific, measurable, attainable, relevant and time-based.
Specific – make sure your goal can be clearly defined and quantified. Avoid using words like more or better, give it a specific value or outcome.
Measurable – it needs to be easily measurable both upon completion and along the way. Am I heading in the right direction? Did I meet the objective?
Attainable – make the goal realistic and achievable based on your current circumstances. No wild pipedreams.
Relevant – is your goal suited to you and/or your family and does it align with your needs and values.
Time-based – in addition to specific, you need to outline a date or time-period in which you set out to achieve this goal.
Putting it all together, we arrive at a SMART goal that is perfectly tailored to your own needs and capabilities. A common example would be – My wife and I want to replace our combined income of $155,000 with income from a diversified property portfolio, so that we can ‘retire’ from 9-5 work in 7 years’ time.
This goal is:
Specific – the couple needs to generate $155,000 income per year so that they can retire from regular work.
Measurable – the goal is quantifiable, therefore success can be measured on a ‘did we reach the objective’ basis. Plus, the strategy will have certain milestones that need to be met along the way.
Attainable – although ambitious, the goal is attainable. If they own or mortgage the property they live in, the starting asset base could provide a significant boost.
Relevant – it is relevant to their circumstances. They no longer want to work a regular job and would like to replace their current income with that from rental property.
Time-based – the couple have set out to achieve their retirement dream within 7 years.
Now remember, the difference between a goal and a dream is a clear and defined strategy of how to get there. Most people have dreams but call them goals. And this is where so many property investment journeys fall apart. Even if there is a strategy in place, it often doesn’t align with the original objective set out in the first place. We often see people choose to purchase property in areas that they are more familiar with, have an emotional attachment to or select a property that they would be comfortable living in as an owner-occupier if the need occurred.
The key is to assign a realistic and manageable strategy to our goals. Understanding what levers to pull, what type of property, the location, where to find opportunities, how many properties and employing value-add techniques all make up the foundation of building your objective-based strategy.
Let’s examine the couple in our first example again. Their goal is to replace $155,000 per year in income with rental income by the end of 7 years. This means they need to build a $1.9 million portfolio that generates an 8% rental return. This may seem daunting, but if they choose the right properties with an appropriate growth and income profile, this is a manageable objective.
They currently live in a 3-bedroom home in Sydney’s Western Suburbs. The property is worth $870,000 and they owe $270,000 on the mortgage. They have enough equity in the property to buy another property outright. But that wouldn’t necessarily be the best option for them. They might want to explore securing financing for two properties by drawing down on their current home equity.
This could then facilitate the purchase of two properties, each around $300,000. The large deposit they pay on each would effectively make both properties positively geared. Meaning that someone else is paying for their wealth strategy. After three years, the couple can repeat this tactic and purchase two more properties. But this time, they can add a granny flat to one of the properties with an oversized backyard – simultaneously increasing the property value by $50,000 and the rental return by 60%.
Assuming each of these properties grows at a modest 7% per annum (excluding the bump up from the granny flat extension), the couple’s income and assets would look something like this:
Property 1 and 2
Starting value = $600,000
Year 7 value = $963,470
Starting mortgage = $300,000 (plus interest)
Year 7 mortgage = $0
Rental income = $72,000 pa
Property 2 and 3
Starting value = $650,000
Year 7 value = $852,017
Starting mortgage = $350,000
Year 7 mortgage = $46,396
Rental income = $88,610 (thanks to the granny flat, our combined rental yield on these two properties is 10.4%)
So, they didn’t quite make it under the seven-year mark and will need to stay in their current jobs for another 3-4 months until they’ve paid down the last of the mortgage for property 3 and 4 (using the combined portfolio income). But they have exceeded their annual income objective by $5,000 – hitting $160,610. They still owe the mortgage on the current home they live in, as their goal did not include having the primary residence completely unencumbered. However, they have successfully replaced their income to better suit their lifestyles.
Should they wish to go completely debt-free there are several options at their disposal. First, they could take a short-term ‘pay cut’ on their rental income to knock out the rest of the mortgage. Second, they could take off and travel while renting their home and have someone else cover the final repayments. A compelling option for when we come out of COVID-19 border lockdowns. The final option, and our best recommendation – rentvesting. They could sell the home and rent instead. This allows them to pay off the remainder of the mortgage and purchase another two investment properties with a higher rental yield than owning in the area they want to live in. This means that for the same ‘price’ they can get a much bigger house.
We discuss rentvesting strategies in more detail here if you are interested to learn more.
This example shows what is achievable with a specific and realistic goal and a purposeful objective to help reach it. Starting with the end in mind and building a strategy for the fastest or most effective route is the best way to attain financial freedom through property.
For advice on building a purposeful property strategy, getting your foot on the property ladder or taking the next steps in your investment journey – get in touch with The Investors Agency.