The Path To Real Estate Success
Most Australians sooner or later arrive at the conclusion that if they do not actively invest they will never be able to accumulate sufficient assets to give them the financial security that they would like to have in the future. At this point, a review of the different asset types usually occurs, and the preferred investment vehicle more often than not tends to be property. This really comes as no surprise to me – property is in my opinion the ideal investment vehicle. By carefully choosing the right property in the right location and using financial leverage intelligently it is possible to create considerable wealth in a relatively short amount of time, at little or no cost to the investor.
Have a clear investment goal
But before you start your investment journey, it is helpful to know exactly where you are headed. For most investors the focus seems to be on what they have, and what is realistic based on their current circumstances. So they drift slowly in the right direction. While this might seem an eminently sensible approach, many of these investors never reach the level of financial independence that they would ideally like. The most successful investors think differently. They are more focused on what they want than what they have. They have some specific financial goals and a specific time frame, and they are committed to achieving their goals. So the journey for the minority doesn’t start at the beginning, it starts at the end. Once you have set yourself some specific financial goals and a time frame, we can form a timeline and identify the different stages of your journey from beginning to end. Only then are you ready to get started.
We can break the journey into four distinct phases.
1. The education stage
This is the first stage, and should be by far the shortest. This is when you start educating yourself and gaining more knowledge.
The problem that most people encounter is that they are good at collecting information, but do not have the experience to process it and filter it in a meaningful way. They get bogged down in the detail, and can end up much more confused than when they started. One way to avoid ‘analysis paralysis’ is to firstly review all the different strategies available to investors, choose the one that suits your circumstances and risk profile best, and then find a mentor who is already a successful investor and is willing to guide you through the process. It is important to acknowledge the fact that it is simply not possible to sit down, read all the books, become an expert, and THEN go out and buy something. It is very unusual to be 100% confident with the first purchase, but once you have a grasp of the basics and a more experienced investor as your mentor, you have to just do it anyway. The longer you procrastinate at this stage, the longer it will take to reach your goals.
2. The Acquisition Stage
This is when you are actively growing your portfolio. Many will be getting a helping hand from the tax man via negative gearing. The more aggressive you are, the faster you should reach your financial goals. In this phase investors often worry about over-extending themselves. However, banks do stress test every deal. After all it is their money and their risk, and they are often very conservative. So if you have fully disclosed your financial circumstances and they approve a loan, then why would you not take it if it is going to help you achieve your long-term goals?
3. The consolidation stage
Once you have grown your asset base to the desired size you will need a period of consolidation. This is because you will probably have leveraged quite heavily during the previous phase, and need time for you rents to rise and LVRs to fall. Your LVR at the end of the consolidation phase should be ideally 50% or lower.
4. Reap the rewards
Most people tend to have a 10-15 year plan to reach financial independence and I believe that the majority can comfortably achieve a lot in that timeframe. I would suggest four weeks for the education stage, eight years for acquisitions and seven years for consolidation. The final stage is the reward stage, where if your plan has gone well you should be sufficiently financial to enjoy a long retirement.
Image by: Olivia Alcock