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Reproduced with permission.
Over the last few weeks, I have detailed strategies that can help you achieve your property investment goals. This week’s article is a summary of all the strategies covered, just in case you missed out on reading one or more of the past newsletters.
One of the most important areas we cover in the Victoria University Property Investment course is that of setting your own goals. I define these goals into five broad categories:
• Retire richer
• Retire earlier
• Supplement your income
• Work part-time
• Give up your day job
How to retire richer
This is the easiest of all the goals to achieve. To retire richer, all you need to do is buy and hold property until you have paid it off.
If you bought a $400,000 property, borrowed the whole amount and took out a principal and interest loan over 20 years, you would own a freehold property in 20 years’ time. Based on the principle that property grows at approximately 2% above the inflation rate, this property would be actually be worth $582,724 in today’s money (taking out the impact of inflation). If you bought two $400,000 properties today and paid them off in 20 years’ time, you would retire on the equivalent of just over $1,000,000!
How to retire earlier
The example I outlined in the article was aiming to retire on $1,000,000 in 10 years’ time by following four simple steps.
• Step 1 – Purchase $1.2 million worth of property.
• Step 2 – Borrow $1.2 million as an interest only loan.
• Step 3 – Hold the properties for 10 years. (Now your property portfolio is worth $2.4 million)
• Step 4 – Sell half of the properties to pay off the debt and use the remainder for your retirement. In other words, $1.2 million worth of property is sold to pay off the original $1.2 million loans and the other $1.2 million of property is sold and used by you to live off during your retirement.
I was not suggesting that retiring in 10 years was easy. I know that paying off one loan is hard enough for many people, let alone trying to pay off numerous mortgages. What I did outline was that the process of retiring earlier is a relatively simple one. You still need the capacity to borrow a large sum of money and the discipline to hold onto all the properties until you are ready to retire.
How to supplement your income
The most common way property investors supplement their income is to renovate; buy, add value, sell.
The first step in achieving this goal is to find a property. The best properties to renovate are period/character style homes. In other words, homes built before World War 2. These include styles such as Edwardian, Victorian, Federation, terraces, bungalows, return verandah villas and cottages. Many purchasers and renters will pay a premium for upgraded, older style homes.
The next step is to renovate. As property investors, I strongly encourage you to stick to a cosmetic makeover. Keep it simple. Painting, floor boards and garden, especially the front garden, are very important features that need attention in a cosmetic makeover. The most important rooms to renovate are the kitchen and the bathroom. This is because these two rooms are the expensive to repair/replace.
The final step is to sell a profit. Presentation is vital when selling a renovated property. Everything must seem perfect!
How to be able to work part time
This goal is just a variation of the goal discussed above on supplementing your income. Basically, to be able to work part time, you need to secure a supplementary income on a regular basis.
The key is to be able to renovate profitably on a regular basis. To help ensure that you make a profit, I outlined the process of conducting a basic scenario analysis. This is where you formulate three sets of figures. The most probable case scenario assumes all goes according to plan. The worst case scenario assumes everything that can go wrong does go wrong. The best case scenario assumes that all goes much better than planned and you sell in a boom market.
How to give up your day job
This is the hardest of all goals to achieve as it takes diligence, effort and perseverance over a long period of time.
The most common way property investors give up their day job is to renovate regularly or become property developers. However, you need to remember that this is not a guaranteed way of making money. There are no guarantees when investing as there is always some risk. Property development is the riskiest strategy of all!
Property development requires a number of major steps:
• Step 1 – Find land suitable for subdivision and development.
• Step 2 – Check with the local council to confirm what sort of development is allowable.
• Step 3 – Have some plans drawn up to present to Council for formal approvals.
• Step 4 – Engage a reputable builder
• Step 5 – Ensure you make a profit! You should have created a feasibility study in the very early stages.
Happy House Hunting!
Written by Peter Koulizos, university lecturer, author and buyers advocate.