GOAL-SETTING DELIVERS THE BEST RESULTS
One of the most effective ways to plan is to set goals that can be measured and are deliverable, but most importantly they must have a deadline. “A goal is a dream with a deadline” said Napoleon Hill, the American author of the bestseller Think and Grow Rich.
While there’s nothing wrong with dreaming, let’s start by setting a longterm goal with a deadline and then work our way backwards.
SETTING YOUR ULTIMATE LONG-TERM GOAL
For most property investors, the ultimate long-term goal is retirement and/or financial freedom. This is when you are no longer obligated to go to work every day. It is the time when your property investment portfolio provides you with an income that meets your lifestyle requirements. The deadline is usually an age when you’d like this to happen. Your age deadline will largely depend on what age you started investing. The younger you were when you started to build your investment portfolio, the earlier you will achieve financial freedom.
A common time line would be 15 years because property market movements generally follow a broad pattern consisting of several years of flat prices, followed by a sharp upswing in values, followed by another plateau (or a moderate correction), and so on. So, 15 years gives you a good chance that a property will be exposed to at least two sharp upswings.
As well as setting a time or age deadline goal, you need to answer the big question: how much is enough?
In broad terms long term deposit rates average 5%. So, with $1 million in the bank, you are looking at an annual passive income of $50K without touching the capital base. If you are looking at $100K annual income when you retire, then you need $2 million in the bank.
Remember, the average life expectancy for Australians these days is 79.63 years for males and 84.64 for females. So if you retire at 60 (ten years earlier than the retirement age set by the government) then you need to fund your lifestyle for 20 years and hopefully more!
The next step in the goal-setting process is to work backwards from your ultimate goal to find out how many properties you will need to own outright (debt-free) in your portfolio to generate the required cash flow in retirement. To keep things simple I will use properties valued at $500K. At a growth of 7.2% per annum, the properties will double in value in 10 years (and almost double and a half in 15 years) and therefore equity generated for such a property is approximately $750K over 15 years.
To generate $50K of income with these assumptions you need to have 2 properties of $500K each, which you hold for 15 years at a rate of growth of 7.2% per annum. At the end of the fifteen year period you will have $1.5 million in equity. One option is to sell the properties, pay about 30% in capital gains (tax is 22.5% max but you need to add back depreciation already claimed, so I assume an effective tax rate is 30%). You are then left with $1 million which will generate your $50K income. This is grossly simplified as it does not take into account inflation, but it gives you an idea of the task ahead.
There are a lot of variables in this exercise. For instance, you can keep some (or all of the properties) if you pay down your debt sufficiently to have the income stream you want. You would save a lot on taxes!
You could also keep properties longer. If you believe these assumptions are too bullish, then amend these numbers accordingly to generate the number of properties you need to get to your dream number. If we peg back capital growth to 5%, then you probably need 3 or 4 properties instead of 2, and you need another to account for inflation. You can also wait longer to get to your magic number. An excel spreadsheet will allow you to work out different scenarios.
MEDIUM TERM GOALS
These will be built around the acquisition of these investment properties. A realistic, mid-term goal would be to purchase three properties in the next three to five years. However, this will depend entirely on your individual circumstances.
SHORT TERM GOALS
These are related to day to day budgeting that will allow you to pay off your home loan more quickly (non-tax-deductible debt) which in turn will help release more equity for your next property deposit.
There’s a popular saying that if you fail to plan, you plan to fail. Goal-setting is an important part of planning and it does lead to success. So why not take some time before June 30 this year to set your new financial year’s goals.
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property