Amid the excitement of accumulating assets, property investors tend to overlook their end goal — that is, when to stop buying and finally focus on paying off debts. How do investors know their own ‘magic number’?
At a certain point in time, after being fixated on finding the next hotspot or formulating the best strategy through the years, investors will eventually have to consolidate debts and pay them off, ultimately going full circle with the question “Now, what do I with my wealth?”
Ideally, property investors would have a plan in mind based on the goals that they have set for themselves in the beginning of their journey, but sometimes, these end goals come as an afterthought, according to Pure Property Investment’s Paul Glossop.
“Unfortunately, it gets to a point where people think, ‘How do I get there?’ They think that buying the total amount of assets is already ‘getting there’ but, in reality, it probably only does about 30 to 40 per cent of the heavy lifting,” he said.
“For me, yes, the asset will do the work for you, and so you’ve got to get them into the portfolio to be able to do the work. But, while it’s all good and well having $10,000,000 in assets with $8,000,000 in debt and holding 80 per cent LVR on a portfolio that’s cash flow neutral, at some stage, you will realise that, either, A: passive income will be a wedge of cash that’s going to come from those assets, so they’ve got to grow and you’ve got to sell them down, or B: you’ve got to pay them off and derive that passive income.
“Most of the time it’s probably a combination of the two, which will take time, very good planning and regular review of objectives and strategies.”
When advising people who plan to begin their property investment journey, Mr Glossop found that they often miss determining their end goal, or exactly what is enough wealth for them.
Ultimately, property investment is not merely about the how of accumulating wealth creating assets, but also, and more importantly, the why.
The property expert said: “Most people think, ‘How do I accumulate?’ but miss, ‘Once I’ve accumulated, what is enough?’”
“Even before you accumulate, you should know what you’re actually wanting to get to — the dollar amount, the cash flow position, the number of assets you need and their values and, ultimately, the plan to get debt eradicated and live the life that you want.”
How exactly do investors know if they have enough?
Mr Glossop said that determining one’s “magic number” is largely based on the investor’s end goal, which is why, in order to avoid feeling lost after years of investing, it’s absolutely important to determine objectives even before buying the first asset.
Naturally, strategies may shift through the years as the investor comes across major changes in their lives such as having a family and changing jobs, but amid these changes, Mr Glossop advised investors to always come back to their end goal, or simply the answer to the question “Why am I investing?”
“Everyone ends up with this magic number or how much passive income they need their portfolio to deliver so they can retire comfortably… Everyone’s numbers are different, of course,” the property expert highlighted.
As an investor himself, Mr Glossop has took some time to determine his “magic number” based on his goals, current personal and financial situation and possible life changes in the future.
He shared: “I personally know my number, and it’s not just the number I pluck out of the air. I’ll look at this with my wife and we go through details and we budget it, because we want to know what we spend on both sides, whether we have to tighten our belts or just spend what we spend now.”
“Right now, I can tell you that if I didn’t have a mortgage against my home, then I need about just shy of $130,000 a year to live my life with two kids with life activities and some pretty good overseas holidays. Basically, a life that’s unrestricted. I’m fortunate enough to know that over the last 15-odd years, I’ve built up both the strategy and portfolio successfully that it pretty much has given me what I need.
“That’s the plan that worked — entering into it with that mindset means I’m now in a position to say enough could be enough, if I wanted it to be enough.”
While setting goals begin even before buying the first property, it’s not all too uncommon for investors to find their priorities shifting and, thus, their goals changing.
To avoid getting blindsided by this possibility, Mr Glossop strongly encouraged investors to consistently review their finances, portfolios, strategies and goals in order to determine the changes that could happen and their long-term implications on their wealth creation journey.
As an adviser, he makes it a point to meet with his clients every six to 12 months in order to realign and recentre their investment journey.
“There’s some pretty simple calculators that we use to plug in people’s spendings and figure out how much they actually need, then we work out what assets they need to give them their magic number, how do they accumulate them and how long is it going to take to pay down their debt,” he said.
“Do they need 10 of exactly the same assets that are cash flow neutral, which will grow over 15 years? The answer is almost invariably no. It’s a combination of different assets, such as development sites, buy and holds, high cash flow assets, commercial assets, and that’s usually part of how we formulate the plan, still in line with where they want to get to.”
Through regular reassessments, investors can anticipate changes in their investment journey and make the necessary adjustments so that, at the end of the day, they are still working toward their ultimate end goal.
“Reviewing that as regularly as you need to — every year at a minimum — building the portfolio and working with professionals, such as your broker and your accountant, will allow the investor to pay down debts over time and realise their strategies regardless of where they are in their journey — whether it’s your accumulation, a sell down or a pay down phase,” Mr Glossop concluded.