Having savings in the bank simply isn't enough to build wealth. So how can investing in property get you on the road to financial freedom, and how much is enough?
Blogger: Cam McLellan, CEO, OpenCorp
The first question I asked myself when I wanted to build wealth was:"How much is enough?"
Here’s how I found the answer.
When I was 23, I scored a job that more than doubled my salary from $40,000 to $100,000. As a young man, I felt this was heaps of money. But after a whole year on my ‘huge’ salary, I realised I hadn’t saved an extra cent.
This is so common, I think it’s the Aussie way of life. However much we earn, we fund lifestyles rather than save. And that’s no way to build wealth.
Once I realised I wasn’t saving enough to become wealthy, I started looking at ways to achieve financial freedom. Back then, I just wanted to supplement my $100,000 income. So I narrowed my options to:
- Cash-flow-positive property
- Growth property
No saving me
The previous year had proven I couldn’t save my way to financial freedom, so the saving option was out.
I knew property was a good option for achieving financial freedom. But when I looked at cash-flow-positive property (where returns exceed expenses), I realised my poor saving record would also shoot me in the foot.
You see, even if I got a property to earn me $400/month clear, I knew I’d just blow it on a bigger lifestyle. I was never going to save it, duplicate my portfolio and substitute my $100,000 income.
And so, unless that property also experienced growth, I’d just be spinning my (ever more exotic) wheels. So cash-flow-positive property was out.
I realised then that growth property was the best option for me to achieve that $100,000.
Let’s look at that in today’s figures, assuming an average $500,000 growth property price and a (conservative) annual price growth of eight per cent.
Remember, I earn $100,000 and want $100,000 per year coming in to replace that.
3 x $500,000 properties = $1,500,000 value.
8 per cent growth x $1,500,000 = $120,000 per year.
By buying three growth properties, I make $120,000 on average once growth occurs. That’s $20,000 more than my goal. But that money isn’t for me to spend on cars or lifestyle. That money is growing my equity base that I can use to duplicate my portfolio and get more and more growth on it.
Unlike the savings and cash-flow-positive property options, the growth property option gives me cake to eat. Great. So when do I eat?!
Well, once I exercise the patience to duplicate my growth property portfolio several times, I become wealthy enough to buy the cake factory. And have as much as I damn well want. That’s why growth property is the way to true wealth.
Once you get going with growth property, the sky isn’t the limit – the limit is up to you. And so, the answer to the great question: how much is enough?
As much as you want!