How To Invest In a High Performing Property Portfolio On An Everyday Income
Who is this article for?
Beginner investors who want to create a sustainable and effective incomestream, to fund a comfortable retirement or even allow them to exit theworkforce early. No matter what your earnings and your income tax rate,investing in property and growing a quality property portfolio can be aneffective strategy for creating lasting wealth.
How should you use this article?
As a basis for understanding how to get started as a property investorearning an everyday income, by purchasing the right types of high performingassets to help you reach your financial goals. Whilst property investing is apopular and proven strategy for creating wealth, there are a number ofmistakes you could make along the way and these have the potential toimpact your profits. This article aims to give you a broad overview of the rightway to create a high performing property portfolio, so you can work towardsbuilding a strong and profitable financial position.
Property investment versus traditional retirement funds
In the past, Australians typically relied on the pension to provide for them inretirement. When it became clear that the pension would no longer besufficient to fund a healthy retirement, the Government introducedcompulsory superannuation.
The current Government pension in Australia is around $400 per week for anindividual and $600 per week for a couple. According to Australian Super, theaverage retirement payout (determined by the average savings for thoseaged 60-64) is around $112,000 for women and $198,000 for men.
Unfortunately based on these figures, it is clear that the pension is notenough for most people to live comfortably in retirement – even whensuperannuation is factored in.
You may be under the false impression that your superannuation balance willlook after you in retirement. But depending on how long you plan on livingafter leaving the workforce, your superannuation may not cut it! As a result,many people will need to consider another strategy to create wealth, in orderto fund a happy and healthy lifestyle in retirement.
Cash investments (high interest savings account) are very low-risk, but theydon’t work in low rate environment. With a savings interest rate of 2%, youwould make just $2,000 per year as your return on investment.This is where property investing comes in.
What type of property investment is best for your retirement portfolio?
When you’re investing for the long-term it’s important to find properties that are poised to enjoy strong capital growth. Growth is the essential ingredient that will ultimately build your wealth.
Growth properties are those homes that are located in areas where demand outstrips supply. An important element here is population growth. At Majestic Property, we suggest a minimum of 2.7% annual population growth rate, and a vacancy rate below 3%. This ensures that the population is consistently growing and rental demand is strong, which puts pressure on housing prices to increase.
A growth asset can help you to grow substantial wealth. For instance, let’s say you take $100,000 and instead of saving it in a high interest savings account, you purchase an investment property. You pay $450,000 and over the next 20 years, your investment property grows in value by an average of 7% per annum.
In the first year, your investment grows by an average of $31,500. Clearly, this is a far favourable result to the $2,000 return you would have received in a cash account! Over 20 years, thanks to compounding growth, your $450,000 property will be worth $1,741,000.
Replicate this result over 2, 3 or even more properties, and you will be enjoying profitable returns and a secure income stream in retirement.
Meanwhile, compare this to a positive cashflow strategy, which means your investment experiences low growth over the long term but puts $50-$100 back in your pocket each week, and the ideal strategy is obvious. What would you prefer: $50-$100 in profits each week, or growth of $30,000-plus each year?
Investment strategies for successful wealth creation
There are many strategies you can use as a property investor, but when your aim is to build a high performing property portfolio and you’re starting from a position of earning an everyday income, chasing growth is generally more important than chasing cashflow.
Furthermore, a low interest rate environment is perfect for property investing in growth assets, as your costs are low during the initial years of property ownership.
Returning to our earlier example, let’s assume you have bought a $450,000 home using $100,000 savings. After paying for stamp duty, legal fees and other costs, you were left with a $65,000 deposit and a loan of $385,000.
Assuming a mortgage interest rate of 4.5% and an interest only loan, your loan repayments are around $330 per week. However, your rental income is $470. This gives you a weekly surplus of $140, funds that you use towards paying property expenses such as council rates, property management fees and insurance.
After depreciation and tax deductions are factored in, you end up owning a high growth asset that is virtually cashflow neutral – that is, it costs you nothing (or next to nothing) to own and maintain.
Overcoming common obstacles as you climb the property ladderAs with all investments, there are a number of considerations you need to be aware of when growing your wealth through real estate, particularly when you’re analysing potential high performance assets.
One of the simplest and most effective risk mitigation strategies you can employ to protect your financial health is to buy the right assets from the very beginning.
This means you need to thoroughly research the fundamentals of each property you consider adding to your portfolio, including its strategic location, access to amenity, local infrastructure, public transport, employment opportunities and more.
Other risks to do with irresponsible or late-paying tenants, property maintenance and unexpected expenses can be mitigated in various ways, including using a qualified property manager and taking out a good landlord’s insurance policy.
How we help
At Majestic Property, we work with investors day-in, day-out as they navigate the investing world and make decisions that will significantly impact their financial future. We know how important it is to plan your investment journey, which is why we work with our clients to help them:
- Identify their goals and what they want to achieve as an investor
- Determine the ideal strategy to achieve those goals
- Assist in finding high performance properties that deliver a minimum 4.5% rental yield and 7.5% annual capital growth
- Provide guidance and feedback on your journey
Many investors make the mistake of assuming that all real estate will eventually grow in value, but this isn’t the case. We use a strategic 7-point property analysis process to pinpoint high performing properties, which can ultimately help you to build your wealth safely and predictably.
We can also help investors to leverage their finances effectively through our exclusive First-Time Investors Grant, valued at up to $15,000. To learn more about this grant, and to talk to us about how working with an expert can help you clarify achieve your long-term wealth and lifestyle goals, get in touch today!