Find­ing fi­nan­cial free­dom through prop­erty

Wangaratta Chronicle - North East Property Guide - - PROPERTY GUIDE -

Writ­ten by | in Buy­ing

In­vest­ing in prop­erty can be a great way to find fi­nan­cial free­dom later in life. This is why, ac­cord­ing to the Aus­tralian Tax­a­tion Of­fice, the pro­por­tion of in­vestors in Aus­tralia reaches its peak for those aged be­tween 55-64, be­fore drop­ping off again af­ter 65. Ef­fec­tively in­vest­ing in prop­erty can leave peo­ple with a steady source of in­come, while com­pound­ing cap­i­tal growth in the long term to pro­vide them with op­tions later in life.

When start­ing to think about find­ing fi­nan­cial free­dom through prop­erty in­vest­ments, it is im­por­tant to both get your head around all of the con­sid­er­a­tions of in­vest­ing in prop­erty, but to un­der­stand that there is a com­mon mis­con­cep­tion of prop­erty in­vest­ing and the build up of wealth. In­vest­ing in mul­ti­ple prop­er­ties to ac­crue wealth is not the same as di­ver­si­fy­ing your wealth. ‘Di­ver­si­fy­ing’ your in­vest­ments is a term of­ten used, but it re­lates to plac­ing your money in var­i­ous as­set classes. Prop­erty is the one type of as­set class. In­vest­ing in mul­ti­ple prop­er­ties means con­cen­trat­ing your wealth, not di­ver­si­fy­ing it, as your money held across mul­ti­ple prop­er­ties is sus­cep­ti­ble to fluc­tu­a­tions in the one mar­ket.

With that in mind, there is di­ver­si­fi­ca­tion pos­si­ble in your prop­erty types. For in­stance, you may look into in­vest­ing in­ter­state. Homes in Ho­bart con­tinue to main­tain their pop­u­lar­ity for in­ter­state in­vestors due to their af­ford­abil­ity, growth po­ten­tial (some of the high­est in the coun­try) and low va­cancy rates.

Switch­ing from long-term growth

Re­ly­ing on your prop­er­ties as a source of in­come when re­tir­ing of­ten in­volves a switch in your fi­nan­cial strat­egy away from one of long term growth (which has been your strat­egy for the past 30 years) to one which re­lies on a larger cash flow. Prop­er­ties that at­tract a higher ren­tal yield as well as low va­cancy rates are good op­tions for in­creas­ing cash flow, while avoid­ing the use of neg­a­tive gear­ing in your in­vest­ments will help you keep your cash flow higher.

You may not have the en­ergy to flip prop­er­ties later in life, which is why you should seek prop­er­ties with short term growth po­ten­tial, such as buy­ing below mar­ket value. Flip­ping prop­er­ties also re­quires a sig­nif­i­cant up­front cost (ren­o­vat­ing with­out a ren­tal in­come, stamp duty, other costs of buy­ing a home). This is why tim­ing is so im­por­tant in us­ing prop­erty in­vest­ments to find fi­nan­cial free­dom. You have years to time this right, so make sure your in­vest­ing ac­tiv­ity oc­curs dur­ing buy­ers’ mar­kets, while pro­vid­ing you with enough time to pay off as much of the mort­gage as pos­si­ble be­fore re­tir­ing.

Switch­ing your prop­erty types

Move away from en­ergy-hun­gry in­vest­ments (those that re­quire you to deal with agents, main­te­nance, emer­gen­cies etc.) to prop­er­ties with less de­mand on your time. In­vest­ing in stu­dent ac­com­mo­da­tion, ser­viced apart­ments or town­house in­vest­ments can be good ways to re­duce the amount of time you have to spend on the main­te­nance of the prop­erty, so that you can fo­cus your en­er­gies on the big pic­ture when it comes to your fi­nan­cial strat­egy.

Is­sues of liq­uid­ity

Us­ing in­vest­ments as your source of in­come of­ten means hav­ing in­vest­ment types that can be liq­ui­dated quickly to open up a source of cash flow. Prop­erty is cer­tainly one of the strong­est long term gen­er­a­tors of wealth, but is fa­mously hard to sell quickly. This is why it is im­por­tant to di­ver­sify your in­come sources later in life af­ter re­ly­ing on long term growth in prop­erty ear­lier on in your ca­reer.

Your sus­cep­ti­bil­ity to the mar­ket

While it is ideal to en­ter re­tire­ment debt-free, this is in­creas­ingly be­com­ing a pipe dream for those Aus­tralians who have not ben­e­fited from high cap­i­tal gains through prop­erty. Aus­tralia’s age­ing pop­u­la­tion will have an in­creas­ing amount of peo­ple en­ter­ing re­tire­ment still in debt. If you do not choose to ser­vice that debt in full with a lump sum pay­ment from your su­per, you need to be aware of how changes to in­ter­est rates or the mar­ket may af­fect your cash flow. In­vest­ing in mul­ti­ple prop­er­ties or even the one ex­tra prop­erty later in life (say, af­ter 50) should be seen as a higher-risk strat­egy if you are go­ing to face high monthly re­pay­ment rates. A safer strat­egy would be to down­size your prop­erty and use in cap­i­tal gains to buy a smaller in­vest­ment prop­erty that will pro­vide a cash flow, while us­ing some of that money from the sale of your home to di­ver­sify your in­come sources.

Seek advice

You need a solid and well-planned strat­egy for your re­tire­ment, which is where an ac­cred­ited fi­nan­cial ad­vi­sor will help. They can help you cal­cu­late ex­actly what you need come re­tire­ment, and how best to reach that des­ti­na­tion. For in­stance, with a gen­er­ous ren­tal yield of 4.5%, how much money do you need in prop­erty to earn $80,000 per year? Do­ing the maths on this may ear­lier on in life will help guide you to­wards es­tab­lish­ing a healthy in­vest­ment base, pro­vid­ing you with more op­tions later on to sell off and di­ver­sify in­vest­ments.

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