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ISCOVER
When building a house, it always starts with a set of plans. Building a property portfolio is no different – it needs to start with a plan and an end goal in mind, so that you can work backwards from there.
To determine this, you need to know your expenses and cost of living now (or the annual dollar amount you would need to retire on in today’s dollars) and you need to determine the size of the asset base required to generate this level of passive income. Ideally, you will review this annually in conjunction with the value of your portfolio to see if you are on target and so that you can modify your strategy when required.
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If you have a short timeframe that is potentially unrealistic – for example if you want to retire in 10 years on $100,000 per annum and you don’t currently own any property – the options are:
1. Ignore your risk profile and follow a strategy that is higher risk for a higher return to meet your short time frame (at the expense of not sleeping at night) OR
2. Readjust your expectations to a longer timeframe, especially if your income and means are limited.
It’s always better to overestimate the income you will need and underestimate the return on the asset pool to allow a margin of safety.
In addition, as we live much longer nowadays, you may need to consider assets that will generate an income for 30-40 years, especially if you want to retire younger than the now standard 67 years of age.
Entry, hold and exit strategies
Entry
This is your ability to enter the property investment market. You need to take into account your budget, cash flow, income, borrowing capacity, job stability and debt serviceability. This, in conjunction with your goals, will determine how to set up your strategy and how often you should review it along the way.
The main thing to take into consideration is to make sure that whatever path you go down, you reduce risk! Always have income protection and a buffer of money to fall back on in the event of an emergency.
Hold
Most investors can buy something – the greater challenge lies with holding it until your goals have been achieved!
You must hold a property long enough to enable capital growth to develop, especially if you are looking at medium-to-long timeframes.
In shorter timeframes, you still need consider your ability to meet debt repayments whilst implementing your strategy.
Tricks such as fixing loans, having savings buffers, not biting off more than you can chew, having appropriate and multiple insurances in place, getting proper tax and accounting advice, reviewing rental returns regularly and maintaining your property will all contribute to your ability to hold over the short and long terms.
Other methods to assist holding over the long term include executive rentals, short stay/holiday rental of your property (subject to zoning), renting the property fully furnished or renting rooms out individually and at a premium compared to as a whole.
Knowing the available options if your situation changes is also really important, as selling property isn’t always the best option in the first instance. These options may include refinancing your debt, taking a repayment holiday, changing to interest only if you haven’t already financed on that basis, analysing your portfolio and selling properties that aren’t performing at the level required to achieve your goals, earning a higher income, or tapping into your savings buffer.
Exit
There are three principal methods of exiting your property portfolio. Depending on how many properties you have bought, how old you are and how long you need to fund your retirement, these will influence the steps you take to exit your properties. These steps should be determined with your accountant and/or financial planner, who can advise on superannuation, tax and superannuation regulations and implications.
Your exit strategy will determine how many properties you may need.
Next month, I will address the fourth step towards property prosperity, which is engaging experts. Until then, go forth and prosper!
Some of the article content is extracted from the book Property Prosperity – 7 Steps to Buying Like an Expert by Miriam Sandkuhler © 2013, with the author's permission
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