How to retire on $100k a year through property

This should be done in conjunction with their borrowing capacity being determined, preferably using a mortgage broker to compare different lenders borrowing capacity calculators in order to maximise what can be borrowed.

The goal the investor has is very important; without an income goal, there is nothing to aim for and there is no clear motivation to what may be necessary to get on track to achieve a better outcome in the future than otherwise might be the case.

These fundamental elements serve to form the foundation for a tailored plan. I believe it’s crucial that an investor purchases all of their properties so that the properties compliment and correlate to their current circumstances, borrowing capacity, living expenses, available surplus income, risk appetite and profile as well as their future income goal.

I specify having an income goal, rather than just a goal like, “I want 10 properties”. In retirement, it doesn’t matter how many properties someone has, what actually really matters is the income someone has to live off.

The number of properties needing to be purchased should correlate with the desired income, as well as of course correlating with their lifestyle. No one should put themselves into a position of risking being a slave to their debt.

An investor should ensure they can afford principal and interest repayments, because at some point the loan will convert to principal and interest from interest only (assuming most investors take out interest-only loans). Having interest-only loans is not the most suitable approach for every person

A smart investor realises that it’s not the number of properties that’s important (if in isolation to an income goal), it is the number of properties needed and the type of properties for the income goal that matters. It is the strategy around the acquisition phase, the holding phase, and the exit phase of a plan.

A smart investor will not just focus on capital growth. The risk of this approach is they might become a slave to the cost of debt of their portfolio, and have to keep working just to make repayments to feed the negatively geared nature of a capital-growth-focused portfolio. They could have sleepless nights if interest rates go up, or if one or two of their properties are vacant.

An intelligent investor will not just focus on positive cash flow either, as they will likely achieve less capital growth over time and, therefore, less wealth in the future. They may have less “growing equity” in their properties to use towards future purchases.

If investors understand the importance of the following three tips, then the investor will be off to a fantastic start:

1. Not blindly trusting a real estate agent representing the seller, or a property marketing company which also represents the seller (developer) when buying a property
2. Learning to appreciate the benefit of a buyer’s agent, and the invaluable reduction in risk, freeing up of time, and reduction or stress that could be achieved by using a property adviser
3. Learning how to properly research an area to invest in

Ultimately, there are several ingredients that go into the recipe of a successful plan to reach your income goal. These consist of:

• the right loan structure
• enough borrowing capacity
• a tailored plan
• overcoming any fear
• research
• sourcing the right property in the right location and negotiation, overlayed by the acquisition phase of a plan (when each property is purchased)
• the holding period of a plan (having enough time for the plan to succeed)
• the exit phase of the plan

On the last point, there are a couple of worthy exit strategies, including sell some properties and pay off the debt on the rest, reduce your debt, assisted by an offset account and principal and interest (P&I) repayments on the mortgage against your principal place of residence (PPR) then on debt against your investment property or if you can afford it, have principal and interest repayments on as much debt as possible.

Too many investors have interest-only loans for five to 10 years, forgetting that the debt must then be paid back in a shorter time, say 20 years, which means the repayments are considerably more per month than if it was paid back over 30 years.

Often, it is the investor that is their own hurdle, they have struggle to overcome fear of exposure to debt, they may struggle with analysis paralysis. This is why engaging a suitably qualified, independent and experienced property adviser and buyer’s agent is important.

Without a plan, investors are doomed to fail. For example, if the investor has a borrowing capacity of $1 million, and they purchase one property, they will probably not have enough to purchase more, so that’s the end of their dream of having a portfolio.

Additionally, if an investor purchases each property in isolation to the other properties they own without the properties complimenting each other with a balance of capital growth and cash flow, they will likely struggle.

Engage a professional to write a tailored plan, have a balance between affording the debt now (deciding between interest-only and principal and interest) and affording the debt in five years on principal and interest, and not being a slave to the debt you have, undertake thorough research, and if you don’t have time, then pay someone to do it for you.

Spending $10,000 to $15,000 on a buyer’s agent to reduce the risk of making a $500,000 to $1 million mistake is worth it. Besides, having a buyer’s agent negotiate for you could save you the equivalent of their fee in the process.