We are taught as kids to ‘get ready’, then ‘get set’, before we ‘go’. Ensure your excitement is well targeted or you could find yourself running off a cliff!
On any given day there can be over 100,000 properties listed for sale in Australia, making it easy to see why so many busy investors feel overwhelmed by this vastness of choice.
As a result, I’ve grown to expect the same question wherever I go: “Where should I buy a property Phil?”.
Regardless of how experienced the investor is, my answer is always the same: “Why do you want to buy a property?”
The reaction to me questioning ‘why’ is commonly one of surprise, often leaving these investors without an answer they can easily share. I’ve learned that most investors don’t really understand what the purpose is, when buying an investment property.
The vast majority of property investors ‘buy and hope’, believing that if they just get into the market, one day it will all pay off, leaving very few who take the time to first clearly understand what it is that they want to achieve before investing in a property.
You might be tempted to skip this step, but please don’t. A failure to understand your ‘why’ often guarantees you will find yourself taking the long road to wealth, or potentially taking the wrong road entirely.
For example, if your ‘why’ is to build wealth so you can enjoy a well-funded retirement, you will first need to get very clear on these two questions:
Q1: How many years do you have to build wealth before you want to retire?
Q2: How much income per year do you require to fund your dream retirement lifestyle?
If this exercise uncovers the fact that you have 16 years to generate an income stream of $80,000 per year, you now have a very specific objective.
A clear understanding of the goal you want to achieve will help you see your investment properties more as a vehicle to create wealth. This will help you avoid the all-too- common mistake of buying emotionally and sabotaging your progress.
Your retirement cash-flow goal should also allow for inflation. A lifestyle that costs $80,000 in year one will cost more 10 years later, if you want to continue to spend at that level. These sorts of goals require investors to target specific properties that best match these requirements.
What path are you currently on?
It’s also important to consider your current wealth position, plus what it would likely be when you reach the date of your goal. It’s common that this wealth may be currently limited to the equity you have in your family home and your super balance. Given that you probably don’t want to be forced to sell your family home when you retire, a lot may be currently riding on your super funds.
I once asked a group of 172 property investors that I was mentoring to roughly calculate how much ‘super’ they will have at retirement. Then I asked how long their super balance could sustain the lifestyle they were planning, before they would need to survive on a government pension.
The results were shocking!
This exercise exposed that most of this group would totally exhaust their super funds in less than six years.
When you understand how many people are totally underprepared for retirement, it’s easy to see why so many families are left with little choice but to sell their family homes, or significantly adjust their retirement lifestyle expectations.
The good news is that you can take back control of this situation.
A well-planned property portfolio is often much easier to build than most investors expect, and it doesn’t have to come at the cost of your lifestyle today.