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The most common conversation the Property Planning team has is with couples and singles that have already purchased property and are unsure of their next steps. They want to invest and also plan for their next home. They are also unsure how to prioritise their decisions. The reason for the uncertainty is that they have not established clear goals for what they ultimately want to achieve. Your goals will reflect which phase of life you are in, relevant to property investment.
There are essentially three phases of property investment: accumulation, consolidation and cash flow.
Accumulation phase, generally speaking, extends from our first property purchased until five-to-10 years before retirement, whilst our income is highest and we have the capacity to take on more debt before focusing entirely on debt reduction. Accumulation takes place each time we purchase a property.
Consolidation phase is consisting of two things: debt reduction, that in turn, improves cash flow. This stage occurs throughout our lifetime apart from when taking on more debt to fund the purchase of a property (or other asset) as this falls under the accumulation period as stated. Occasionally when we are on reduced income, for example when having children, we may need to tread water with our debt or even dip into some equity to maintain our preferred lifestyle for periods of time. Consolidation is the most common phase during our lifetime, given most of us purchase a handful of properties throughout our journey. Therefore, the rest of our lives are ideally dedicated to consolidating by reducing interest payable on our debt, and improving cash flow as a result.
Cash flow phase is when either rental income surpasses our holding costs or we liquidate and/or downsize property to turn the equity into cash. We should be aiming to transition to this phase some time leading into retirement or soon after. The sooner we reach this stage the better. Usually we would start this period within five-to-10 years of retirement as previously stated. This timeframe is important as it provides enough time after your final purchase for compound capital growth, rental income increases and debt reduction/savings to take effect, irrespective of the market cycle. If you purchase your final investment property with the assistance of borrowing too close to retirement, you run a greater risk of a poor return – or worse, a loss – when you decide to sell it.
When you start out with clear goals relevant to your current phase of life as well as having an eye on the long term, you can be more effective in developing strategies within your overall plan.
Our home is usually the highest priority of most people’s property strategies from the time they decide that they want to reside in a house they own. Often this goal coincides with the decision to start planning for a family. The family home tends to remain the centrepiece of property ownership until we settle on our final place of residence. Therefore, you should always be factoring in your home buying strategy, even if your next property purchase will be an investment. We can then ensure the investment strategy is woven into the home buying/lifestyle strategy.
Many property ‘advisers’ or ‘spruikers’ neglect to take into account your desires around your own home while assisting with property investment strategies. We have found that by making sure your home and lifestyle goals are included you will achieve a simpler and more effective Property Plan for investment properties. Lacking focus on the family home within your property investment strategy as well as an absence of a Property Plan will inhibit you achieving your financial goals.
As previously noted, goal-setting is fundamental to long term success. The basic reason for this is that you can’t get where you are trying to go until you clearly define where that is. There is a direct link between goals and enhanced performance. Goals help you focus and keep you motivated when you feel like giving up. Your Property Plan allows you to set goals for the short and long term which serve as a gauge of how you are tracking. Having a plan helps to keep you accountable and empowers you to achieve your nominated goals.
Click here to make a time to discuss your personalised property planning needs or call the office – 03 9819 4088 (Melbourne), 02 9387 1344 (Sydney).
David Johnston, Managing Director