~---· COVER STORY • Quit Work Sooner

HOW TO

WITH PROPERTY

' 40 • APIMAGAZINE.COM.AU • JANUARY 2017

Do you dream of having the freedom to choose how you spend your days?

Here's how to break free of the grind via property investing.

VANESSA DE GROOT

Quit Work Sooner • COVER STORY l!!!!!!!!!!l!!I••

B eep .. . beep .. . beep ... BEEP ... BEEP ... BEEP! Was that the sound you were rudely woken by this morning, demanding you rise from your slumber?

Wouldn't it be nice to have the choice as to whether or not you went to work each day?

Investing in property can give you that choice, with the right strategies enabling you to retire sooner - and with substantially more money in your pocket - than when the age pension eligibility kicks in in your 60s.

Property gives you financial freedom by providing a consistent income stream to replace your salary, something other asset classes don't do, according to Momentum Wealth managing director Damian Collins.

The sooner you get started on the road to financial freedom the better - so say the experts.

For many, the idea of retiring early through property sounds great but in reality seems just too hard. If you break it down into simple steps,..hqwever, it's clear that anyone can do it -

· although it won't necessarily be easy. The first step is to identify your goals and the next is to

formulate a plan to reach those goals. Your goals will largely centre around determining the

income you want to have in retirement, and working backwards to determine what your portfolio will need to look like to achieve that.

JANUARY 2017 • APIMAGAZINE.COM.AU • 41

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No pain, no gain There's no beating around the bush, according to Momentum Wealth managing director Damian Collins; sacrifices w ill need to be made if you want to retire early through property.

If you buy a growth property in any major capita l city, he says, even with low interest rates you'll likely have negative cash flow.

But he says you can either sacrifice now and aim for a substantial pay-off in retirement or not sacrifice now and instead make a very substantial sacrifice in retirement when you have to live off the pension for 25 years.

Slack-Smith adds that often when you're trying to achieve something that isn't average - such as an early retirement -you'll need to make sacrifices.

That might be with your time - i.e. spending weekends renovating or looking for properties; or your budget, by cutting back on discretionary spending for a few years; or with your social network, as you'll miss the regular catchups or dinners out based on the two other sacrifices you make.

"I see this as a future tax," she says. "You pay this tax now so you can enjoy

the freedom of doing what you want, with whom you want, when you want, and more importantly you're buying your right to say 'no'.

"'No' I don't want to work five days a week, 'no' I don't want to retire on $31,000 (the pension) when I'm 70, 'no' I don't want to get out of bed today. To me this is financial freedom."

''Having a diversified portfolio ...

speeds up the path to financial

choices.'' TABITHA BRIGHT

42 • APIMAGAZINE.COM.AU • JANUARY 2017

According to the experts, the majority of investors want between $100,000 and $200,000 per annum.

Assuming you've paid off your own home, says Tabitha Bright of Positive Real Estate's education and coaching division, a basic lifestyle - accounting for just your "needs" - will likely cost around $50,000, while if you also include some "wants" you'll likely come up with a figure around $80,000 to $100,000.

If you then factor in a more luxurious lifestyle, the figure may climb to more than $100,000.

In order to create that income, Bright says, broadly speaking you'd need around $2 million to $2.5 million of debt-free property (around five to six properties), ~ssuming a 5-per-cent rental yield, which would give you an income of around $125,000 per year, gross.

This excludes your own home since it doesn't provide an income, unless yo.u plan on downsizing, in which case some of your home value can be included.

• GETTING THERE How do you create that? In simplistic terms, Bright says, in as short a timeframe as safely possible you'll go out and buy $2 million in property, and since on average property doubles every 12 to 15 years, after that timeframe your portfolio is likely to have doubled in value to $4 million.

Assuming you haven't paid a cent down, you can then look to sell down half your portfolio, pay off your debt and you've got your $2 million to $2.5 million portfolio.

You'll also need to consider the time it will take to build your required portfolio, which will then determine at what age you can retire.

Bright says to achieve the above scenario, it's usually a 12- to 15-year journey, but the faster you're in the market the better.

If it takes 10 years to acquire that $2 million portfolio, then you'll have to wait a further 12 to 15 years for the most recent properties to perform.

According to Collins, you need a long­term plan and to keep your focus on it, not allowing yourself to get disheartened along the way.

He believes it's more likely a 20- to 30-year timeframe for most people on an average income to get into retirement.

There are the rare times when i11vestors make money quickly, but the

The power of leverage Leverage is the key to building wea lth, according to Tabitha Bright of Positive Real Estate.

If you had $100,000 and were going to buy a property but didn't want to pay lender's mortgage insurance (LMI), then the simple way to work out borrowing power is:

$100,000 + 25% (20% deposit+ 5% costs)= $400,000. So, at 80% loan-to­value ratio (LVR), $100,000 would get you into a property purchase price $400,000.

If you were OK paying LMI , say $10,000 cost to you (potential ly capitalised on your loan), your borrowing power is:

$100,000 +15% (10% deposit+ 5% costs)= $666,000. So, for the sake of $10,000 in LMI you get an additional $266,000 in the market.

If you buy a property for $666,000 instead of $400,000 and it goes up 10%, it gains $66,000 in equity instead of $40,000. So you've paid $10,000 in LMI to make $26,000 in profit. This gap widens the longer you have the property in the market, too.

Thus when beginning your journey, it's often better to pay the LMI and leverage with "other people's money" (i.e. the bank's).

vast majority of the time property is about the long haul, he says.

"You'll have periods of time such as in Melbourne and Sydney recently where growth runs up strongly, but more often than not it's steady and slow;' he says.

Your income level and commitments, eg. if you have dependants, will affect how difficult it may be to achieve an early retirement through property, Collins says, but you just need to have a plan and regularly review that plan according to what happens in your life.

Once you've set your goals and a plan, you'll need to determine what your investing strategy is, and for many that will be buy and hold, allowing time in the market to work its magic.

Bright says it's best for investors to start off with a "safe plan'' that has three phases - acquisition, consolidation and lifestyle (when you enter into retirement or have more freedom to choose).

The acquisitions phase will involve building a diversified portfolio with properties in major markets around Australia - avoiding volatile markets such as mining towns - to capture the

growth as each goes up at different times, she says. "When you look at the property clock, each city will be at a different spot at any given time - for example, Brisbane might be at nine o'clock, Sydney at the peak and Melbourne at 10 o'clock;' she says.

"So, if you have properties in different markets, you've always got a property somewhere performing [well], so you always have equity to pull out when you have the opportunity.

"Having a diversified portfolio ... speeds up the path to financial choices:'

The acquisitions phase is all about using leverage to grow your portfolio, putting down as little deposit as possible and borrowing as much as possible. This, Bright says, will give you the ability to grow your portfolio faster.

Director of Investors Choice Mortgages and

can get equity to "recycle their deposit" and acquire another property quickly to keep them moving forward and building their portfolio.

The choice of strategy an investor adopts will depend on their individual circumstances and risk profile, Collins says, but generally the goal is to generate capital because, ultimately, that's what'll give you an income stream in retirement.

Slack-Smith says in theory it's a good strategy to have a mixture of growth and cash flow properties so at the end of every month you're not too much out of pocket.

But if you're trying to retire early, the benefit of a non-growth cash flow property will be outweighed by the "gobbling up" of your borrowing capacity, potentially preventing you

from purchasing a growth­based property.

• • I • Your Property Success Jane Slack-Smith says the faster you create the portfolio you need, the sooner you can sit back and watch it grow.

Q/A "If, however, your cash

flow property has growth potential or, like I do, you use renovation to manufacture the increase and rent and hence cash flow, then you have the best of both worlds:'

While there's no set number of properties

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you need to retire early, Slack-Smith says the more properties you have going up in value the better off you'll be when you decide to retire, and if your properties deliver better results you

to ask a question of Tabitha Bright.

Damian Collins or Jane Slack-Smith After the acquisition

phase, Bright advises investors to "get a hobby and leave the property alone" -that is, forget about it and

~~ mw. get to retire sooner. (See 'Requirements' on the following page.)

She says the key is knowing which areas will deliver the gains you need.

Collins agrees it's absolutely crucial to get your property selection right - if you buy "dud" properties it can completely . ruin your plans.

"So many people don't get past that first property; they don't have a plan and get stuck. It makes them a bit of money but it won't change their life:'

Bright says it's crucial to be buying consciously, especially if you want to achieve an early retirement or speed up the process.

"I see clients that buy without a defined plan or strategy and over time they'll get a result, but you're often looking at a longer timeframe - say, 20 to 25 years-plus:'

She says it's particularly important for someone starting out to buy in an area with imminent growth, so they

benefit from growth through time in the market.

Often people get bored waiting for something to happen, she says, and decide to sell within six years, derailing their path to financial freedom.

In the consolidation phase, Bright says investors will assess how their properties are performing and - assuming they've paid off their own home already -will either buy again or, if they hit a roadblock, they may need to undertake a renovation or subdivision, for instance, to manufacture equity so they can continue to acquire.

She adds that at this stage, if servicing is your issue, you might start to pay down some debt. By then your investments may be either neutral or positively geared, and you might start maldng principal and interest repayments to fast­track the debt reduction.

If you're younger, you probably have more time up your sleeve to adopt a buy-and-hold strategy, but if you start investing later in life you might need

Qu it Work Sooner• COVER STORY---·

Don't jump the gun Your Property Success director Jane Slack­Smith dreads meeting people who have quit their full-time job too early.

"They tell me they 've thrown in their job and now want to be a full-time investor or renovator, often because they've seen a slick salesperson tell them that it's possible," she says.

"What they don 't tell them is they need an income to borrow money, they need the money to buy the properties, they need the properties to get to their goals.

"Some bel ieve they can do a joint venture (JV) with 'the money partner' to achieve this but successful JVs are years in planning and hard to come by in my experience."

Momentum Wealth 's Damian Collins advises investors to wait until the point they absolutely don't need an income from their job and have the assets to live off.

"Think it through before you quit and plan for how to live off your investment properties."

Top tips for retiring early •Buy growth properties to help enlarge

your portfolio quickly •Decide on your desired level of risk to

determine your strategy •Have the right finance structure -

financial inefficiencies can stall the growth of your portfolio

•Consider investing in property through superannuation

•Pay down your bad debt and the mortgage on your principal place of residence as quickly as possible. Use your tax refund via negative gearing tax deductions to help

•Have a buffer for the unexpected •When selling down make sure you

have a strategy to maximise your tax effectiveness. Talk to you r accountant for the correct advice on rationalising your portfolio effectively.

JANUARY2017 • APIMAGAZINE.COM.AU • 43

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I COVER STORY • Quit Work Sooner -"· . ~

to undertake riskier strategies. Or you after expenses;' Collins points out.

Requirements might just have an appetite for risk. "But if you invest in commercial or I

Bright says once you've got your "safe commercial property syndicates you're I I

Portfolio required now to achieve the plan" ticking away for you, you can likely to generate $150,000 income:' indexed income required, expressed in try strategies outside the sphere of just He advocates, therefore, having a I timeframes (with 7 per cent per annum buying and holding. blended portfolio at the end whereby capita l growth). "Those that are more entrepreneurial hopefully you have a net 5-per-cent

I ••• can try something more speculative, yield, with residential yielding less ii

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• ~ ~ ' , ·:I I-: I such as building a duplex and and commercial yielding more, and i

I 5 $3,288,300 $5,558.300 subdividing/strata-titling, doing a full your assets are still going up in value,

I renovation or trying Airbnb for extra preserving your wealth. 10 $1.735,100 $2,932,900 cash flow;' she says. If you're retiring early, Slack-Smith 15 $1.1 22,800 $1.897,900 Collins notes some people adopt a says, you're going to have many more

20 $793,800 $1 .341 ,800 development strategy, whereby they years ahead of you to fund.

25 $588,500 $994.700 make a profit and move on to the next So, just to be safe, in case you need to project, but it's risky. dip into your principal, she says you'll

Assumptions: LVR 90 per cent, capital "It's not guaranteed that every two want to have a mixture of income-

growth 7 per cent per annum, se ll ing cost years you make $400,000, for example;' producing assets - i.e. money in the 2.5 per cent, inflation 2.5 per cent, tax rate he says. bank - and you'll also want to have

I 30 per cent, return on savings in the bank "Some years you might make assets going up in value - i.e. property 5 per cent. $600,000, and others zero. or shares - so you can sell those in the *Disclaimer: This calculator is for "It's not as simple as it sounds, but it future to give your income a surge.

I demonstration purposes only. Please can be done:' Slack-Smith says many people think consult your accountant or financial planner the exit strategy is to sell everything and to discuss your specific circumstances. • READYING FOR RETIREMENT put the money in the bank and live off NB all pre-tax dollars.

Once you've passed through the that, but the more advanced strategy These calculations are estimates and based on repayment of the original interest acquisitions and consolidation phase, is to sell a number of the properties

-only loan, taking into account capital gains you'll hit the lifestyle phase, Bright and repay the debt, or even better, put

tax and selling costs to result in a sell-off of explains, which is when you secure your those sale funds into an offset account the entire portfolio and the funds deposited position for retirement. against an interest-only loan and maybe into a term deposit and pre-tax income In this phase there are earn a smaller income returned. several options as to what ' 'Some to supplement your Source; Jane Slack-Smith. Your Property Success. Figures calculated using; you do with your portfolio, super or other business ht1p://investorschoice.com.au/portfoUo-calcu!ator

i according to Collins. years you or employment income i Portfolio required now to achieve indexed He says some people (maybe two days a week)

income required in timeframes (with 4 per will build a smaller might make and still have properties

11 cent per annum capital growth). portfolio and then focus going up in value.

••• on paying down debt, $600,000, She says when you're

11 . .-·. ~~ ·. ·: •• -:I while others - with ready to stop work entirely,

I potentially a higher risk and others you may have then paid off " 5 $5.275,800 $8,91 7,900 profile - might build a the remaining properties

10 $3,214,300 $5,433,300 portfolio of eight or nine

zero.' ' or can sell them. I

15 $2,329,000 $3,968,000 properties and then sell Meanwhile, if you're not

20 $1,833,100 $3,098,500 some to pay down the DAMIAN COLLINS ready to retire completely,

25 $1,513,500 $2.558,400 remaining debt at the end. but you're at a point where

During the accumulation phase, you can start to think about retiring, 1'

As you can see, the income you want and investors should focus on properties Bright says, or at least have lifestyle

the timeframe in which you want it, as well likely to grow in value to create wealth, choices, you can pull out a certain

as the assumptions you make about the but when you get close to retirement percentage of your portfolio - say, 1 per I

properties you buy, are very important to you should look at the income stream, cent (perhaps $50,000) - without your your immediate purchasing goals, according Collins adds. end goal being affected, and reward to Slack-Smith. That could mean potentially putting yourself by going on a holiday, for

I "What it also demonstrates is the your funds into commercial property, instance, or taking a year off work.

importance of location,'' she says. specifically trusts, as they're a less risky You can pull this out of your portfolio i "For instance, if you don't do your way to go but can generate a 7- to 8-per- in several ways, she says, such as through research and your property only delivers cent net return, significantly higher than a line of credit or redraw or offset funds. 4 per cent per annum capital growth, the residential property. ''Around the five-year mark you can figures change drastically.

"For a $100,000 income in 15 years you "If you have $2 million worth of usually pull out a chunk of cash to

would need not a $1,897,900 portfolio but residential property and no debt but do something with and over the next

a $3,936,800 portfolio." you're in Sydney or Melbourne, you'd 10 years it won't make a big difference to I be lucky to get $55,000 a year in income the end result:' ml

44 • APIMAGAZINE.COM.AU • JANUARY 2017