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Reproduced with permission.
The idea of substituting your salary with income generated by property investment is very appealing to many, but beware the temptation of trying to do it quickly. Many people who promote this concept actually run businesses that make money from you buying lots of properties to fund their personal lifestyle and property investment portfolio. It is possible to be on a middle income and develop a strong level of replacement income that allows you to work less and potentially not at all in time. However, do not expect this to happen quickly. Property is a get rich slow scheme for the vast majority. Trying to speed up the process always increases the risk of failure and heightens stress levels. Short term higher returns always involve much higher risk and time commitment when it comes to property.
Some examples of more common short term property strategies include:
- renovating and flipping
- adding ‘granny flats’
The level of time you need to put in yourself, as well as the risk you bear through the additional cost involved can eat significantly into any profits. Some examples of where extra risk can bite include:
- cost of skilled labour
- delay due to tradies/councils
- things not going to plan e.g. running behind schedule, weather delays, running over budget, mistakes and miscalculations along the way
- holding costs – interest on the debt used to fund the purchase and construction
- no rental income to supplement costs during construction or renovation
- Capital Gains Tax (CGT) – especially if you do not qualify for the 50% exemption
- additional purchasing costs – usually adds around 5% of the actual purchase price
- selling costs
- value of your time (apply – and multiply – the equivalent of your hourly rate of employment). Think about how more productive and skilled you would be if you put this time towards your profession. Increased productivity results in increased income from most professions.
For most professionals on higher than average incomes, replacing your income through property investment is more difficult. Low risk investment strategy involves purchasing high quality real estate, holding it for the long term and letting capital growth do its thing, while focusing on your chosen career and enjoying your lifestyle. As Warren Buffet (the world’s richest and most famous investor) said, “Wealth is the transfer of money from the impatient to the patient” and he has more experience than anyone on the planet.
Ask yourself what’s holding you back from making great property investment decisions? Why shouldn’t you be empowered to create your desired lifestyle for you and your family? Is there any suitable answer other than ‘nothing should be holding me back’.
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) or 08 8373 5588 (Adelaide).
David Johnston, Managing Director