I’ve found that while most professionals hope to one day replace their personal exertion income with cash from their investment properties, superannuation and share portfolios, most don’t have a strategy to achieve their goal.
Whilst they know that they need assets such as shares and property to generate returns to replace their income, I’ve found most don’t actually think about how they’ll actually achieve financial freedom. They don’t have a strategy. They don’t have a plan. They just hope it will happen.
With a solid plan one can build a portfolio of assets leveraged by debt – and over a period of time reducing the debt , which will reduce the interest payments while the income from these assets will increase over time .
So while earning high incomes – assets are acquired using debt – and over time, the debt is significantly reduced , so that by the time you retire – your asset base is significant giving you strong cash flow , and your debt has been paid down.
Because Property is a long term investment and not easily bought and sold (unlike shares) it seems a lot safer to leverage property vs shares.
Banks tend to be more comfortable lending against property (80pc lvr is not uncommon)
However as a long term strategy – it could be a good idea to also build a portfolio of shares as well (higher returns, franked credits etc)
This should be modelled by a financial planner to suit your specific needs
This paper is about creating a property asset base.
1. Build a substantial asset base
But the first stage of your wealth creation strategy always involves building a substantial asset base…..
And the best way to do that is to buy high growth properties with the help of leverage (good debt)
Leveraging and compounding growth is a powerful combination to help you with your goal to financial freedom!
2. Lower Debt over time
Ways to lower debt
• stop buying investments – and use your funds to reduce debt so that while the value of their portfolio keeps rising, their loans remain much the same.
• add value to your property portfolio by manufacturing capital growth through renovations or development;
• pay off some debt using your superannuation;
• reduce your debt by pay off principal and interest; or
• reduce your debt by selling a few properties
If average yields in investment property is 5pc and expenses relating To those properties are 50pc (the 50pc rule) , you need $4m of investment properties to generate 100k of income (2.5pc)
So while property is great for capital gain, it could be important to diversify your assets in the cash flow stage to increase your yields.
3. Use the property trick :-
Project 15 years to your retirement and assume you have 5m worth of property and you have a debt of 50pc LVR (assuming you acquired properties using an 80pc LVR over a period of time and you have had average growth whilst paying down your debt.)
Let’s say you needed 100k in cash to supplement your income – you could increase your loan against your portfolio – and use that cash for whatever you need – and its tax free! (Be aware that the interest on the loan taken out for personal use would not be tax deductible)
If your portfolio increases by 5pc per annum (250k per annum) and you draw 100k per annum from your portfolio – your portfolio still increase by 100k per annum!
And you now have a cash machine!
It takes time to build a substantial asset base and a comfortable loan-to-value ratio. But if you take advantage of the magic of leverage, compounding and time, it happens.
4. The market cycle and risk mitigation
Over a 15 year period, interest rates will change, property prices will vary and there will be changes in the economy. Your personal situation may change and you may not be earning for a while.
Make sure you have a buffer to ride the highs and lows, and look at risk mitigation strategies (speak to your financial planner in this regard)
5. Follow the 4 key ingredients to creating Your Financial Freedom
1. Get a plan – from a financial planner you know like and trust . Ideally a planner who understands the power of leverage and property. Plan your future – set SMART goals (Specific, Measurable, Achievable , Realistic with set Times)
2. Take action and stick to it – most property investors stop at one property
3. By the right property at the right time – don’t have preconceived ideas of where the best properties are to buy – rely on research and independent advice (don’t be sold by people with vested interests )
4. Use people that you know, like and trust and who come highly recommended.