How to invest in property

Question:

I have just started investing in property. I want to grow my property portfolio as fast as possible. How do you recommend I achieve this while minimising risk? I currently own my primary place of residence with about $220,000 remaining on the mortgage (valued at $450,000) and have just used this equity to purchase an investment property valued at approximately $585,000 (will rent for approximately $540 per week). From here I would like to purchase additional 4 - 5 properties over the coming 5 - 10 years.

My answer:

Thank you for asking this question. Achieving solid investment outcomes only happens via disciplined strategies with a long term outlook. The trickiest part of investing is avoiding making bad behavioural decisions based on the emotional. 

Successful investing starts with realistic expectations, respecting the investment fundamentals and hiring a third party professional who will draw your investment plan and will ensure you stick to it.

You want to buy one property every year, or every two years – how? If you plan to put cash into each property (minimum deposit plus costs on each purchase) you’ll need to save hard. What is your cash flow position? If you want to keep using equity (by relying on future growth) your goal is not realistic.

From your question it kind of looks like you’ve made up your mind, so if you do go down that road, here’s a few things I would consider and encourage you to implement in your plan.

Avoid acting emotionally

Partner with a third party professional who can draw a time and dollar specific plan in order to help you making objective decisions about your future. This may sound basic but hiring an experienced professional with the objective point of view is money well spent.

Diversify 

If you’re going all property (which I would not endorse) then think of different types and locations. If you’re narrowing your investment strategy to only one idea, you’re putting all your eggs in one basket - all your planned assets would end up in same property. If  you don’t have exposure to different assets you have no backup plan. Also, consider investing in equities to increase an exposure to different assets in your portfolio.

Avoid euphoria

Don’t buy what’s popular, otherwise you possibly lose the sense of risk (when you’re worried that others are making more money than you, you’re in the euphoria zone). It’s the opposite of panic and capitulation and it’s equally dangerous. False expectations are set, your behaviour is completely emotional and the investment decisions are not being thought through. You also lose the sense of value and you end up buying overpriced assets.

Have plenty of equity

Protect yourself against unforeseen events (interest rates, loss of tenants, etc.) and make sure you put at least 20% of cash into each property. This will likely go against your goal of growing your portfolio ‘as fast as possible’, but it’s crucial you don’t expose yourself to high debt.

Don’t speculate

Take a long term view and look for an increase in value over time, rather than chasing short term price movements. You may still think you’re investing but you haven’t realised you crossed the line. If you’re looking at short term price fluctuations, you will end up burning your fingers. Don’t overthink the process; keep things fairly simple, an excitement belongs to Vegas.

Cover yourself and your plan

Have relevant protection strategies to protect your ability to earn income (may need it if property income doesn’t meet your expenses) and to have available cash to deal with the unexpected without pulling money out of your plan.

Lastly, you’re not mentioning this in your question, but what’s your end strategy? 

Assuming you reach your goal of owning ten properties, what do you plan to do with them? Keep them to fund your retirement? Sell them one by one to free up cash? You need to think about this before you start so you won’t get stuck at the end (you may have unnecessary problems with tax, liquidity – access to your money, reliability of income etc.)

Hope these tips help you clarify your points of focus. I believe you’ll consider them carefully before making any investment decisions. Shop around and invest in quality financial advice. It will be worth your while to look for someone who will focus on the dominant determinant of your financial outcomes – your investment behaviour.

Best wishes,

Michal Bodi

How much do I need to retire comfortably?

How much do I need to retire comfortably?

Question:

What would be the super amount/balance needed for a ‘comfortable’ retirement for couples when we reach our retirement age, which I understand is $56,406 in today’s dollars? My husband and I are 56 and 50 respectively, and have an SMSF with $600,000.

My answer:

Retirement planning is an ongoing, evolving process that requires plenty of foresight and I applaud you for thinking about it now. 

This is a common question that unfortunately cannot be answered based solely on the information you have provided. The answer will depend on many variables and your own expectations in regards to longevity of your money. 

Are you happy for your capital to run out at a particular age or you would prefer a perpetual income and the ability to pass your wealth on to the next generations? When do you wish to retire and what is your own idea of a comfortable retirement? 

The figures you have quoted as a comfortable retirement income are based on averages (ASFA Retirement Standard survey, June 2013) and they very rarely reflect reality. For example they only include $2,725 per year for an overseas holiday and they don’t allow for any extra cash for gifts to your grandkids...

Once you work out your own retirement budget you end up with a retirement income figure that reflects your own financial reality and you've completed the first step of many.

It’s important to realise that the retirement planning process is not a mathematical equation. It’s not just a matter of plugging the figures into a calculator. We live in a fast pace society that suggests it should be that simple. But even a simple calculation is only as good as the figures and assumptions used.

It is absolutely critical to realise that retirement income planning is way more complex and way more important to people than a single conversation. It requires expertise and the careful consideration of many factors. It requires wisdom – we know that a tomato is a fruit but we don’t put it in a fruit salad.

The next vital detail is to remember that every date and dollar specific retirement income plan (that also addresses ‘what if’ scenarios) requires a financial coach and their ongoing assistance to ensure you to stick to your plan. This is the only way of knowing whether you are on track with your retirement plans or not. And having this certainty is priceless.

I realise that the hardest thing for most people is the first step – to recognise and overcome the fear of experience and make an appointment to consult an expert. But it will take a lot of pressure off your shoulders. It can also mean the difference between getting it right and living the retirement you always wanted … and getting it all wrong.

by Michal Bodi

As published on FPA’s Ask an Expert website dedicated to promoting the value of financial advice - ttp://askanexpert.fpadifference.com.au/

Image courtesy of Michal Marcol / freedigitalphotos.net

Hoping to retire one day? Consider this!

Hoping to retire one day? Consider this!

Retirement is a huge milestone in peoples’ lives. It has many faces and we reach it in a number of different ways. Sometimes it happens suddenly, sometimes it is planned for. Sometimes it is voluntary and other times it may be forced upon. 

One thing is certain though, retirement is the single biggest, most terrifying financial decision people ever have to make…and it involves large sums of money and lots of emotions.

Financially speaking, retirement is essentially an income problem. 

The only two objectives that matter and count in retirement are:

•  Lifestyle sustaining income that lasts a lifetime

•  The income needs to keep pace with increasing cost of living.

Unfortunately, due to extreme circumstances (the biggest, the most terrifying and emotional time) the focus of most retirees is everywhere else but on these two main concerns. The talk is about certainty and safety. But it is the concept of safety that’s usually misinterpreted and lures retirees into the trap of a financial tragedy.

Shift in retirement planning  

Most baby boomers have inherited their parents’ concept of ‘planning’ for retirement – being looked after by government and/or receive an employer supported pension. 

In past, many employers offered what were called ‘defined benefit pensions’. Although, far from perfect, these used to be a source of some income, which in combination with social security income, allowed the veteran generation to live a modest lifestyle they were used to.

Defined benefit pensions are no longer being offered. So unless you already have one in place or lined up, you will have to look after your retirement yourself. 

And the social security pension?

Firstly, it will hardly be enough to afford you a decent retirement.

Secondly, the demographics of Australian population are changing – the baby boomer generation has already doubled the long term average of people retiring per year. 

And it continues to increase it to an estimated number of 140,000 retirees per year in about ten year’s time. See the graph below:

The wave of new retirees is crashing over the next 30 years - started in 2008

So, what’s the point?

• There is more retirees, with no retirement plans, relying on someone else to look after them in retirement

• The government policies will inevitably have to change to deal with the dramatic increase in demand of age pension applications

• Relying on government support(or any other income support in retirement for that matter) is simply not a sensible strategy if you want to retire on your terms

If you still think that the government will look after you and you are happy with that prognosis, stop reading now. I wish you all the luck in the world.

If, however, you wish to retire on your terms, keep your dignity throughout your retirement and stay retired for the rest of your life, you might want to pause for a moment and think about the steps you are taking towards your own retirement.

We have now established that we need to shift the focus from government and employer support to relying on your own savings in retirement.  

But you will need to plan to make sure you’ll be able to rely on your lifetime savings.

Please notice the use of the verb ‘plan’. 

There is no secret to a successful and independent retirement other than having a long term, time and dollar specific plan which will clearly determine whether you are on the right track or not.

By having a plan I do not refer to a ‘good’ superfund, a portfolio, good investment returns, low fees, great product features and benefits, healthy economy etc… etc….

What I mean is addressing and knowing more-less exactly:

• how much money you will need at the time when you retire (so you'll be able to draw a lifestyle sustaining income for the rest of your life)

•  how much money you currently have

• how much money you need to contribute each year into your savings in order to get to the first number

• how you need to invest your funds and why

The only way to even begin answering these questions intelligently is to sit down with a quality financial planner and have an honest conversation. 

This is a first step of the planning process which will ensure that one day you will be able to look back with a smile.

Because you will have some certainties in life and you will be in control. And it will only happen if you decide to do something specific about your future today.

It’s called planning.

by Michal Bodi
 

Image courtesy of photostock and  freedigitalphotos.net