Retirement riches: How do you get from A to B?

By Nina Cuturic | 09 Apr 2020

It shouldn't come as too much of a surprise when Wayne Jessup, property investment coach and director at The Property Bloke, says that around 80% of people who contact him want to gain control over their finances before retirement.

“The average age that they meet with me is probably 40, but some come earlier and others a bit later,” Jessup says. “That would be the bigger percentage, though: at around 40 years of age when they are starting to realise that they’ve been an adult for 20 years and have just 20 years left until they are 60.”

Having to create a new game plan for future wealth can make a borrower “nervous”, he adds, explaining that this can sometimes happen when the person’s biggest mortgage has been about $300,000. When the time comes for them to extend their portfolio, they become focused on the debt level and “are not looking at the asset side”.

“You can buy a set of properties, but how do you get them paid off? That’s the biggest question. There are different strategies, like property options, room sharing, different ways to bring cash flow into it and capital, as well as liquidity,” Jessup says.

If you are 40 and you want to retire at 50, it’s possible, but he says you need to be prepared to put in the hard yards to make that happen.

“If you are enjoying property, and you want to be working in property investing every single day, I teach people how they can do that and basically give up work as quickly as possible,” Jessup says.

“It all comes down to how aggressive you would like to be ... some people like to buy just a couple of properties and other people want to become full-time property investors”

But for those who want to continue with traditional employment and use property as a wealth creation tool so they can enjoy a solid retirement, he says the amount of time you have on your hands to work towards your retirement goal will largely determine the strategy you use to reach your goal.

“Let’s say you have 10 years or 20 years from where you need to be. You have to add inflation to that, so [you calculate] the figure or the size of the portfolio that you need for that time and then you work backwards year by year – depending on how many years you have to make that happen ¬– by adding what sort of property in what year,” Jessup explains.

For instance, if you have a 20-year investment timeline and you wish to end up with a portfolio of properties worth $2m in today’s dollar terms, then you might decide to buy four properties worth around $500,000 each.

“It all comes down to how aggressive you would like to be as a property investor as well. Some people like to buy just a couple of properties and other people want to become full-time property investors.”

An investor’s appetite for risk also shapes their approach.

“We might focus more on just cash flow, rather than capital growth. It always comes down to whether you have a mortgage or not, how much equity you have, and obviously as you get older we do focus a lot more on cash flow,” Jessup says.

“You need cash flow to retire, and you need it to pay your debts down,” he adds.

Leveraging regional opportunities

Time is there for the taking, but it’s also limited. Exploring more affordable markets can mean the difference between buying an investment property this year and buying one a few years from now, as Simon Pressley of Propertyology says.

“If you have a deposit that is sufficient to buy a property, consider ‘which markets can I afford to buy a property in with that money today?’ rather than saying, ‘I have a deposit but it’s not enough to buy in Sydney, Brisbane, Melbourne or Perth today’. Those cities are a very, very small percentage of this massive, massive country,” Pressley explains.

If an investor continues to work hard to accumulate a larger deposit, capital city markets can also continue to outrun them – that is, grow in value and remain out of their reach – as time goes on.

Alternatively, a smaller deposit could get them into a non-capital city, allowing them to plant the seed for retirement earlier – and in a market that could quite likely have greater potential than what some people might think, Pressley says.

“Every single year there will be numerous non-capital locations that will outperform capital cities,” he points out.

“Investors always need to remind themselves of that, because there are dozens and dozens of non-capital city locations and only eight capitals; it doesn’t mean that they are all good investments, but it’s in our own interests to have an open mind and explore where we can potentially invest.”

Putting in the hard yards

When working nine to five, an investor may not have the time to give their portfolio as much attention as they would later in life, when they would have more spare time in their day. In fact, for some, engaging in property can turn into a passion project during their retirement.

Brett Warren from Metropole Property Strategists says, “A lot of the times it’s a different strategy by then: they have an asset base and they might want to chase some cash flow for retirement; they may be looking to diversify; they may have significant shares or funds and may want to correct their asset into something that has a bit more cash flow, like [moving into] commercial property.

“So, later in life, once you get past 55 or 60, it’s a very different strategy to when you’re 35 or 40.”

If an investor holds the right assets, they can also see these double in value during their retirement years, allowing them to create further wealth during that time.

Warren says it’s the value of the asset base that matters most, because that is what is going to give investors choices in life.

“We had a client who had a $10m property portfolio. He owned one property. He was 70 years old, and he’d bought an old shack in Sydney harbour near the water for probably around $25k or a small amount and he held it,” Warren says.

“It doesn’t matter how many properties you own; it’s about the value. If someone has a $10m asset base you’ll be impressed; whether they own 10 properties or one property is irrelevant.”

Your proposed timeline

The less time an investor has to invest before retirement age, the more focus, attention and effort will be required of them, says Brendan Kelly of Results Mentoring.

“In an ideal word you probably want to start [investing] in your late 20s, early 30s, because that is a slow, long path when you can get time working for you, and it doesn’t require a lot of effort on a regular basis,” Kelly says.

“If you start in your late 30s or early 40s, that’s still plenty of time. You will need a little bit more focus, a little bit more attention, and, generally speaking, a human being doesn’t wake up to retirement or the need for retirement until they are 40.”

By the time you reach your late 40s to early 50s, Kelly says a more concentrated effort will be needed to achieve the financial outcome you want by age 65, if that’s the goal.

Warren explains, “If you are 35 rather than 55, that’s a huge advantage. A 35-year-old can potentially retire at 55 if they get the right-sized asset base and the right kind of advice and buy the right kind of property.”

Regardless of your age, he says there are “three stages to wealth creation” (see boxout, opposite page) that can guide the investor along the route to creating and moulding a property portfolio that will give them more financial freedom when they need it the most.

“The first seven or 10 years of investing should be about accumulating assets – accumulating high-growth assets. Your asset base is leverage, compounding and adding value. It’s not about buying seven properties in seven minutes; you might only buy three or four properties, but it’s about quality over quantity,” Warren explains.

Once an investor has built their asset base, they may have $2m or $3m in assets, he says, and the next seven or 10 years might become more geared towards minimising debt.

“You may add value, you may do a renovation, you may do a development; your properties will likely be giving you an income, and that’s the time to start switching from growing to lowering and consolidating your asset base and paying down debt.”

“It doesn’t matter how many properties you own; it’s about the value. If someone has a $10m asset base ... whether they own 10 properties or one property is irrelevant”

You could also consider selling a property or investing in commercial property as you begin to transition into retirement.

“You will obviously have the cash flow from your rent, but if you can diversify and get into some commercial property or funds that are going to increase your income, you can lower your debt levels faster and also have some money to live off as well,” Warren says.

“Right now we are at recordlow interest rates of 3%, so it’s not difficult to find a cash flow positive property, but in five or seven years’ time, when interest rates are back at 5% or 6%, most investors may then get stuck with properties that aren’t cash flow positive any more and aren’t growing in value or creating enough wealth for them.”

Tax on positive cash flow properties and the tightened lending landscape also need to be considered, Warren says, suggesting you “invest for the longer term and don’t make decisions based on short-term scenarios”.

Furthermore, while there’s the argument that an investor might need to be more “aggressive” in their investing approach if they have less time on their hands, Pressley adds that “if you are aggressive and something unexpected happens, you’ve got no time to recover”.

He explains that breaking your available capital up and dispersing it across multiple properties located in entirely different parts of the country can not only improve your cash flow but be a good form of risk mitigation if the market takes a turn.

“If that happens to someone and they are 55 years of age, they haven’t got time to recoup the losses of investing in a poorly performing market. If they diversify into di erent markets, then with the [much lower] chances of it happening in three or four locations, or however many they have, they’d have to be really, really unlucky for that to occur,” Pressley explains.

“I avoid big, expensive cities and intentionally target cities with diverse economies, specific industry profi les, and a body of evidence that gives me confi dence in job creation – a key driver for property price growth. Within our chosen cities, we target standard houses in central locations, priced at $300k to $500k and with yields at circa 5%.”

Brett Warren from Metropole Property Strategists explains how to secure future wealth by making sure your property portfolio works harder for you over the long term

1. The accumulation stage

Focus on widening your asset base with leverage and compounding with high-growth assets.

YIP: How many years should you spend growing your asset base?
Brett Warren: I would suggest seven to 10 years in a low economic growth environment.

YIP: Do you have any tips for widening an asset base?
BW: Find properties where you can add value so you are not just relying on the market to do all the heavy lifting. Work backwards from your end goal and focus on quality of properties over quantity.

YIP: What are some of the things to be mindful of?
BW: Focus on asset appreciation over cash fl ow. Avoid get-rich-quick investments, as building true wealth takes time.

2. Consolidation stage

Aim to gradually pay down the debt and lower the LVR on your investment properties.

YIP: Do you have any tips for lowering debt?
BW: Focus on principal and interest repayments and make additional payments to speed it up. This is a good time to add value – renovate or develop existing assets to boost value as well as cash flow.

YIP: How should you expect the make-up of your property portfolio to change during this time?
BW: After 10 years, most low-yielding properties will likely become cash fl ow neutral to positive and will give you an income, which should be directed to paying down debt. Perhaps sell a property to reduce debt as you move closer to retirement.

3. Living off cash flow

Once you’ve built your portfolio and you’ve given it time to mature in value, youcan transition your strategy to live off the cash flow.

YIP: How does your focus as an investor shift once you are in retirement?
BW: In the first 10 to 15 years it is all about capital growth. Now the focus switches to cash flow and receiving an income from your portfolio. Favour holding higher-yielding properties at this point, as capital growth is not as important

YIP: How might an investor branch out during retirement to increase their cash fl ow?
BW: Now is a good time to consider a commercial property with a higher yield to produce more cash fl ow.

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