The lifestyle vs investment conundrum
From our experience purchasing a long-term home is the key plank of a successful lifestyle for most Australians, and as such is a high priority. For this reason, most investment strategies should be built around the purchase of your home.
As this is generally your largest outlay in life, it makes sense that it should involve the greatest amount of time spent planning to ensure you get it right. Contentment from lifestyle choices can be hard to measure. People might be unhappy about their home; its location; the amount they did or did not spend when they purchased; their proximity to family, schools or other amenities; employment opportunities and so on. Poor decision making can not only cause ‘daily’ mental discomfort with lifestyle choices, it can also cause significant financial losses in opportunity costs through having to sell a property or due to poor capital growth.
Buying and selling multiple homes over your lifetime is a silent killer of wealth for most Australians and inhibits people’s ability to set themselves up for a prosperous retirement as commonly as purchasing a dud investment. If your home is your top priority, yet the expense to purchase your home is relatively moderate, this can allow for more scope to purchase investment properties.
If you are based in a capital city and want to live within reasonable proximity to the CBD, capital growth drivers for your proposed home are more vital to your long-term wealth.
The upside is that if you select a home with strong capital growth drivers, you may only need to purchase one or two investment properties, because when you downsize you will have access to a significant amount of equity to harvest to fund the flexibility stage of life.
This benefit of downsizing is compounded by the principal place of residence being capital gains tax free. There are currently incentives to downsize and place surplus money into superannuation which is a superior tax environment. The more capital that you plan to commit to your long-term home, the more you need to consider the capital growth potential of the home.
In short, the lifestyle strategy within your Property Plan is as important as the investment component for most people.
Lifestyle Property can include four classes:
- First (or stepping-stone) home.
- Long-term home.
- Down-sized home.
- Holiday home.
Your overarching investment strategy should be based on the philosophy that you want to buy as few quality assets as is required to reach your long-term financial goals. For most, this means owning between 1-4 investment properties plus your home. While some commentators promote quantity over quality, at Property Planning Australia our proven philosophy is that when it comes to property, you should focus on quality over quantity.
We were the first to say that:
- You only need a few well selected properties to set yourself up for retirement.
- We want our clients to make as few property decisions as required to meet their lifestyle goals.
We still firmly believe these statements and we notice that more commentators are starting to get on board with our way of thinking!
When you remove emotion from the investment decision and approach the investment property market through the prism of purchasing the right product you are more likely to make a successful property (product) decision.
Smart investing will allow you to build up surplus equity and income which is free from personal exertion. In addition, diversification within your property portfolio through location and asset selection can help you manage risk and create further choice as you transition into the flexibility stage of life.
If creating your ideal lifestyle is your top priority, which is the case for most, your investment strategy should be built around your lifestyle strategy. This is a point neglected by many property advisers, property spruikers and the media. Once settled in your long-term home without any plans to upgrade, your investment property strategy can be developed without impediment.
Keep in mind that with any investments such as property or shares, unless you are aggressive or take greater risk, it is unlikely to replace your income in a short period of time. We consider 10 years as a short-term investment time horizon, 20 years as a medium-term horizon, and 30 years or more as long-term.
This means your greatest investment for almost everyone is your professional income and ensuring your Money Management System allows you to trap surplus so you can accumulate wealth to replace your personal income in later life.
David is the Founder and Managing Director of Property Planning Australia, author of ‘How to Succeed with Property to Create your Ideal Lifestyle’, co-author of ‘Property for Life – Using Property to Plan Your Financial Future’, co-host of the ‘Property Planner, Buyer and Professor Podcast’ and a widely-published media commentator. With more than 20 years of experience, David is passionate about educating others to make informed, and ultimately, more lucrative property investment decisions. David established Property Planning Australia in 2004 – with the vision to educate and empower Australians to make successful property, mortgage strategy and money management decisions. Property Planning Australia’s operations have earned acclaim and national industry awards for its unique fusion of property planning, education, money management, mortgage strategy and risk management. All supported by multi award-winning customer service.