Full time investor: Do quit your day job

By

First published 18/12/2012


Fed up with your job? Sick of taking orders all day? You are not alone.

The desire to be anywhere else than the office, store, worksite or kitchen is certainly not a unique feeling. If you want to become a full time property investor though, you will need to be unique in every way. It is not enough to simply not want to work. As a matter of fact, in many ways, it’s the opposite.

You may have grandiose dreams of sipping cocktails on a deckchair, while all the properties that you own keep pumping money into your coffers, but any full time investor will tell you this is not how it works.

“You will work harder than what you ever have sitting at your desk; and with more stress,” says investment mentor Paul Wilson, managing director of We Find Houses. “This is because it’s all up to you now.”

Note the term ‘full time investor’. The job is full time, because researching, managing cash flow and keeping your affairs in order takes up as much time as an actual job…often more. You have to possess the drive and work ethic to make it happen. And it won’t happen overnight. To transition successfully from working stiff to professional property investor requires careful planning, analytical skills, and an unwavering level of dedication. You might feel an uncontrollable urge to run out and quit your job immediately, but settle down there partner, full time investing is a case of ‘ask questions first, shoot later’. 

Questions to ask yourself before taking the leap

  • Am I prepared to work full time as an investor?
  • Can I digest information and predict trends?
  • Am I an effective manager of people, time and paper work?
  • Can I negotiate with confidence?
  • How much income do I need to get by?
  •  Do I understand how equity, loans and other numbers work?
  •  Have I educated myself adequately?
  • Have I set realistic goals?
  • Am I able to budget effectively?
  • Do I have a comprehensive plan that I will be able to stick to?

How well do you know yourself?

Not many Australians are full time property investors and this can be put down to the fact that it’s not easy. You need a diverse skill set, including the following:

Analytical skills

These allow you to draw on the research that you conduct, gain an understanding of the property market in general and predict different economic trends. This skill will help you make decisions with confidence and negotiate deals convincingly.

Management skills

You must communicate well, stay on top of your portfolio and encourage others to help you achieve your goals. The further you travel along the property path, the more managing you will have to do and work you will have to delegate. Your charisma and effective communication will help you deal with tradespeople, real estate agents, tenants and others.

“Managing other people becomes your job,” says buyer’s agent Nathan Birch, CEO and founder of B Invested. “You don’t see Ronald McDonald mopping the floors or putting cheeseburgers on the shelves at McDonalds. If you’re an investor, you’re steering the ship and you are like the CEO of your property portfolio.”

Financial skills

These are essential for calculating your returns and yields, balancing your books and tracking the money coming in and going out. You need to know exactly how much income you require to get by, forecast your cash flow and debt and understand how loans and equity work.

If you are confident you possess the above skills and have the brain power and drive to make everything work, you are ready to begin your journey towards full time investing.

Cash flow analysis

You might make some great property investments, but you can’t eat equity. You might not have a family to support or other responsibilities, but you will probably still be surprised by what you spend. To get a real idea of this number, you should spend several months keeping a diary that details every cent you spend.

You can take two things away from tracking your finances. Firstly, you find out what you already spend, while working on your current income. The figure will most likely come as a surprise to you. Secondly, you will be able to differentiate between necessary spending and frivolous spending; how much you actually spend, compared to how much you need to spend.

Your monthly cash diary

Income ($70K pa)

Gross salary (month)

$5,833

Tax

$1,462

Net income (month)

$4,371

Expenditure

Purpose

Cost per month

Mortgage/ rent

$1,800

Car

$400

Lunch

$250

Coffee

$70

Groceries

$400

Clothes

$150

Alcohol/dining out

$700

Sport and recreation

$150

Total spend

$3,920

Leftover savings

$451

The above table provides a frightening look at how the numbers can add up when it comes to incidental spending. Apart from obvious necessary payments such as mortgage/rent payments and groceries, a number of other frivolous spending areas will severely restrict potential savings.

The latte index

If you want an example of how to save money through small cost-cutting, take a look at your café habits. Let’s say you buy one coffee a day on your way into work:

1 x regular latte at the café next to the office = $3.50

$3.50 x 5 = $17.50 a week

$17.50 x 48 (four weeks removed for annual leave) = $840 a year

Get your budget back to surplus

When Positive Real Estate CEO Sam Saggers entered the world of property investing, he was punished for a poor decision. However, the disaster enabled him to bounce back harder.

“I bought my first property with my life savings, which at the time was $30,000,” says Saggers, “I actually lost it on my first property deal. The loss was a powerful lesson, but an equally great lesson that I learned was how to save the $30,000 in the first place. It was budgeting that allowed me to try again. Within 18 months of my initial loss, I once again budgeted my way to a deposit.”

Saggers stands by the conviction that a budget is about making small adjustments that can significantly change lifestyles. If you can identify what can be audited to cut costs, as well as look well in advance and plan for surprises, your budget stands every chance of success.

Small changes for big savings

Extra savings

Car

$80

Lunch

$230

Coffee

$60

Clothes

$100

Alcohol/ dining out

$400

Sport and recreation

$100

Total extra savings

$970

Plus initial savings

$451

New savings possible

$1,421

Using the earlier cash diary as a guide, it is possible to boost monthly savings by nearly $1,000, by cutting out unnecessary expenditure.

-You can walk to work or carpool one or two days a week and save $80 on petrol each month

-Packing your lunch each day is far cheaper than an average $12 spend at the café across the road

-A $10 tin of instant coffee can replace the expensive lattes that you have been buying

-Spending a few months eating in and consuming alcohol at home makes for a massive save

-Put that gym or golf club membership on hold for a while for $100 extra in your pocket every month

An extra saving of $970 per month means you are $11,640 better off a year, with a total annual save of $1,421. Two years of these simple budget alterations will get you a 10% deposit on a $280,000 property.

 

Set yourself achievable goals

Your ultimate goal is to become a full time investor, but you can’t go from zero to 100 immediately. You need to first figure out some stepping stones that will get you into the market and making money while you continue to work. As you achieve each goal, you can readjust your plans and build up the income that will eventually become your bread and butter. Remember, you need to keep the money coming in while you are in your acquisition phase.

“You need to maintain cash flow or have enough of a buffer in funds behind you for support,” says Wilson. “You also need to be able to access funds from banks, meaning you must demonstrate your ability to service loans.”

Having a large sum of cash in the bank might not guarantee a loan, as the bank will want to see evidence of your ability to meet repayments with regular money coming in.

Having built his own portfolio through value-adding renovations, Wilson has firsthand experience of the questions you need to ask yourself.

“You can’t go in without a comprehensive plan,” he says. “You need to know what your skill set is, what your resources are and how your business model works. For a reno strategy, will you do the work yourself, or get someone else to do it? Do you have the time? What extra money will you need to pay? How far are you prepared to travel and how long can you be away?”

You need to understand the strategy you’re going to adopt, then acquire as much knowledge as you can around that strategy. You also have to be analytical about your general finances.

“What’s your debt reduction strategy or your capital growth strategy?” says Wilson. “Will you be active or passive? If passive, is your cash flow sufficient to sustain expenses and living costs?”

These questions are all the reasons why it pays to take your time to prepare yourself thoroughly. You don’t need to get there faster than anyone else, just devise your own plan and stick to it.

Go back to school

At the same time you are tracking your daily spending and devising your strategy, you should also be undergoing your property education. Comprehensive learning will help you understand what shapes the real estate market, in addition to knowing how to recognise good suburbs and analyse indicators. Think of it like a sport. If you want to make a living from a sport, you have to become elite. In addition to your natural talent, you have to sweat it out, training at an elite level. Familiarise yourself with the learning material that is available.

“A lot of people go in with expectations and then lose money because they’re not armed with an education,” says Birch. “Use the internet, check out free forums and read some of the books that are out there.”

While learning, be wary of so-called educators that have products to sell. Your education should be for your own benefit and not affected by the agenda of a spruiker.

It is important to look at information that affects property in general, such as Reserve Bank decisions, building industry reports and economic papers; as well as information on specific markets, such as sales in different suburbs, which areas offer undervalued buys and where government spending is likely to boost growth. It may sound like a lot of work, but that’s because it is.

“I used to spend about eight hours a day on realestate.com.au, in my first three or four years” says Birch. “I was building up relationships with real estate agents and letting them know what I was after.”

Relentless legwork enabled Birch to become well known to agents, who now sometimes alert him to upcoming deals before they are listed online.

“Some people say real estate is boring and they don’t want to read up on anything, they just want to have it all done for them,” Birch says. If that’s the case, you run a high risk of not doing the right research and making a big mistake. Being an investor, you can be as active or passive as you want and obviously, the more you put in, the better the results are going to be.”

These days, Birch has a passive income of $250,000 a year through property, but his passion forbids him to take a step back and relax just yet.

“If I wasn’t as active as I am now, I wouldn’t have gotten to where I am today,” he says. “Even now, I can fall asleep at 3am holding my laptop, still trying to find deals, because that’s what I love doing.”

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