Posted on 25/09/2016
It may be the single biggest mistake Australian investors make. They get into the business of buying real estate without first establishing clear goals - and strategies for reaching them.
Establishing goals in the beginning can be the difference between success and failure – and the earlier people start the better.
Matthew Wall, director of multi-disciplinary advisory PPI Advice, says the most common goal behind building a property portfolio is to achieve financial security in retirement or to have property to pass on to children so they have a better start in life.
Whatever the ambition, the investment process will require planning and application.
“Building a real estate portfolio is not a luxury pastime bestowed on a lucky few, nor is it a mammoth unachievable burden,” he says. “But the process requires diligence and discipline”. It means research, planning, goal setting, patience and grit – the ability to withstand setbacks.
“The key factor behind all this is motivation – the strength in the individual’s desire for financial independence and the action steps it takes to activate it and achieve these desires.
“Goals provide focus and direction. Without them, it’s easy to become side-tracked by daily drudgery and personal chaos - and that can means nothing gets achieved.”
The PPI Property Investment Guide says a goal can be articulated in many ways, but it’s important not to confuse goals with strategies. Achieving financial independence is a goal, while acquiring 10 properties in 10 years is a potential strategy for achieving the goal.
“To formulate your goal, you need to be realistic. However, it is always healthy to aim higher than what you believe you can achieve,” the PPI report says.
“The earlier in life an investor begins, the better off they will be in their twilight years. Anyone aged in their 20s is not too young to enter the property market as either a home owner or investor.”
PPI suggests that a good starting point in the planning process is to estimate how much money the person will need to live in their 60s and 70s.
“Regardless of age, estimate how much annual income will be needed to live comfortably in retirement, then calculate how many properties it would take to generate this level of income,” it says. “People need to be realistic. If someone is already in their 50s, their opportunities are reduced. “
Using retirement as the starting point of the plan, the investor can then work backwards, thinking about what they want to achieve and the steps they can take to achieve it. Some of the considerations are their risk profile, life circumstances and financial capacity.
Life circumstances include relationship status (single, married or planning marriage), the number of children and the target retirement age.
“When outlining your financial capacity, consider present and future income, including likely promotions and pay rises, and reductions to household income – for example, if you or your partner decide to take maternity leave.”
The report suggests that one way to keep investment goals within reach is to break them into smaller and more manageable steps. It’s common to have short-term goals (1–3 years), medium-term goals (5 years) and long-term goals (10+ years).
“For example, your strategy may be to own three investment properties within 10 years,” says Wall. “Your short-term goal could be to save a deposit or build equity in your principle place of residence so you can buy your first investment property. Your median-term goal might be to buy your first investment property and build equity to $300,000 within three years.”
To achieve these short-to-median-term time frames, investors sometimes need to increase their financial outlay, but the results can be outstanding, he says.
“As specialised buyers’ agents and development managers, we can help investors achieve huge returns using tried-and-tested property strategies. Returns of between $300,000 and $500,000 net profit within two years represent an extremely desirable outcome for most investors. These are not guestimates, but factual returns we have achieved for our clients.”
Wall says it’s likely individuals will have to make adjustments to their property investment plan as market conditions or life circumstances change.
“But with their objectives mapped out, they can regularly use the plan as a reference to help remain motivated and achieve your goals more quickly.”