This week I want to talk about strategy; something most investors don’t actually take into account. Everybody invests for a reason, normally financial and normally to provide for themselves in their retirement. So why is it then that the average investor only owns 1 investment property and 75% of the population are reliant on a government pension? The reason is people buy houses without knowing why they are buying the house.
The best way to explain this is the scene from Alice in Wonderland where Alice is talking to the Cheshire cat asking which road she should take. The cat then asks her where she wants to go to, Alice replies with ‘anywhere’ in which case the cats answer is, well then any road will take you there. If you do not know what it is you want out of your investing then any house looks good.
I use Steve McKnight’s strategy for achieving my financial destination: Build up a large kitty, invest it into debt free commercial property returning 8% and receive a residual income for the rest of your life. There are two ways to build this kitty. The names Steve has given them are Wheel of Wealth and the Monopoly theory.
Wheel of wealth is designed for more active hands on investors; whereby you spend less than you earn, invest the surplus into quick cash investment strategies and invest the profit into income generating assets.
Monopoly theory is designed for passive investors who have a medium to long term investment horizon. It involves buying property as close to each other as possible to maximise your returns and increase capital gains to on sell or develop at a later date. This strategy could include buying cash flow positive property, land banking or buying at the right time in the right place to maximise capital appreciation.
People have many ideas of what a portfolio should include, however it all comes down to each investors circumstances. What is your attitude towards risk? How active/passive are you? What is your skill base? The reality is as long as your portfolio can support itself then it is a good portfolio. Once you have a bit of passive income coming in you can afford to take on some riskier projects because the passive income will pay for any negative gearing.
Being a hands on investor I prefer the wheel of wealth method, however I am planning to purchase as much property surrounding my home as possible and holding it with the idea of developing. So how big of a kitty do we need?
First step is to figure out the income you want to retire on? For me it’s $100 000 pa. If we were to receive $100 000 as an 8% return then I would need (100000/0.08=) $1 250 000.
Step 2: When do you want to be financially free? For me it is in 5 years time. I already have $160 000 therefore 1250000 – 160000 = 1 090 000
Step 3: How much do you expect to make from each deal you do? Mine is $30 000 after tax per renovation. So 1090000/30000 = 36 deals over the space of 5 years or 7.2 deals per year, that’s pretty much 1 deal every 6 weeks.
This may sound difficult, but it if you are more passive then you have a longer period to achieve this by. If you are still an active investor and don’t think you can do 1 every 6 weeks then raise the profit expectations or lower your kitty requirements.
With a destination and a map then everyone can achieve the investing goals they are aiming for.