Build a 10-property portfolio without the stress
Building a 10-property portfolio may seem like a daunting challenge, but it’s more attainable than many may think. Custodian’s James Fitzgerald details some steps investors should take to create a stress-free future.
Everyone wants a comfortable retirement but few people realise just how much money it takes to fund it.
If you ask most people they say they would like to have between $70,000 and $80,000 a year to retire on.
Most would be shocked to realise that in order to retire on $70,000 a year you need around $1.5 million in assets and to own your own home.
Very few people will ‘save’ enough money from their paid employment to fund that comfortable retirement they so desperately want.
Realistically, the only way you can do it is to grow your wealth, you could try the share market, and plenty of people have made plenty of money doing that. But one of the most secure ways to build your health is through investing in properties.
Note I said properties not property.
That’s because while the majority of Australian residential property investors only own one investment property, you really need to own multiple properties to grow your wealth.
There are just 2,107 Australians with ten or more investment properties and 20,357 Australians own more than five investment properties.
To put that in perspective, there are 13 million Australians employed and 8.42 million households in Australia.
Unfortunately, many people wrongly think you need to have a lot of money to invest in multiple properties, that’s not correct.
Sure, you need some money to start out, but realistically it’s about building equity and using that to fund your continued investment.
About 421,000 households in Australia earn an average income of $525,000 and 3.37 million Australian households earn an income of more than $136,000.
Yet only 2,107 Australians own 10 investment properties.
Despite having the income why do so few increase their wealth through building a substantial investment portfolio? What do the few property investors with ten investment properties do that is so unique?
- Buy and hold
While it’s generally true that the median house price in most capital cities doubles every 10 years, property prices don’t go up in a linear fashion.
The longer you hold an investment property, the better you do.
Yet 25 per cent of all property investors sell within a year and more than half of property investors don’t hold for more than five years.
Since 2009 the Sydney median house price has increased from $544,000 to $1,100,000.
- Reinvest your growth
Most property investors fall into the temptation of selling their property once it has grown a little in value or they rest on the laurels of their success and don’t reinvest the growth into expanding their portfolio.
Around 71 per cent of property investors own just one investment property and that number has hardly changed over the past decade.
Yet in that time the median house prices in Sydney and Melbourne have grown by $400,000 and $260,000 respectively, with half of all properties growing by even more than that.
- Cash flow neutral or positive
The biggest mistake many make is that property investors don’t understand and manage their cash flow.
My mentor and author of 7 Steps to Wealth, John Fitzgerald, says cash flow is like oxygen; run out of it and it’s over very quickly for you. You can’t remove that risk; you can only manage it.
Less than half of all property investors – 40 per cent in fact – own properties that are cash flow neutral or positive. That number gets higher and higher as investors own more properties.
That’s not a coincidence and is vital when it comes to building a property portfolio, particularly if you want to do it in a relatively stress-free fashion.
You might be thinking that all of this sounds simple, and it is. But that doesn’t mean it’s easy. That’s not me saying that it’s the data.
Obviously the first step in growing your portfolio of ten properties is to buy that first one.
It shouldn’t just be any property, but one that meets the criteria for a sound investment. That is something with a good land ratio (land appreciates in value, buildings depreciate), a stand-alone new house (units don’t grow in value as quickly as houses and they have no land component) and in a growth corridor (growing population and incomes).
Once that first property grows in value by 10 per cent to 15 per cent, you have enough equity to fuel the purchase of your second property.
Once that grows in value you can invest again and so on, using the same formula.
If you’ve picked the right properties to start, in the right locations and they’ve shown sufficient capital growth by the time you have amassed your ten-property portfolio, you need only sell one of two of them to reduce your borrowings.
This will leave you with strong equity in the remaining properties as well as ongoing rental income from them.
This method of investing is called compound growth which is the secret to growing wealth through property.
My suggestion is to not invest in just one market, spread it throughout different capital city markets, as they cycle at different times.
This allows you to maximise the number of years in a given 10-year period that they have properties going up in value.
Owning property in one market might give you strong growth (more than 10 per cent in a year) for two to five years out of ten. Owning in two markets might mean that it becomes four to seven years.
While owning in three different capital cities could mean you have properties growing six to nine years in a ten.
This becomes a game changer in terms of how quickly you’re able to expand your portfolio by reinvesting that growth.