The Three Stages of Property Investing

Now that you know what strategy you are going to be using at the start of your property investing journey - i.e. buy and hold, it is important that you understand what the journey actually looks like for someone who successfully uses property investing to achieve their desired financial goal (e.g. retirement).

Generally speaking, your typical successful property investment journey can be broken down into these three stages:

1. Accumulation Phase

2. Consolidation Phase

3. Freedom Phase

Accumulation Phase

Chances are if you are reading this website you are in this phase (whether you know it or not). This is the phase where you aim to grow your asset base as much as possible and as quickly as possible - you want to be aggressively, but sensibly, taking advantage of leverage to purchase properties.

The emphasis on doing this quickly is so you can start experiencing the benefits of compound growth that we discussed above as soon as possible. Or in other words, you want to frontload the majority of your property purchases so that you can rely on compounding to do the heavy lifting throughout the most of your life up to your desired age of retirement.

As we have mentioned many times before, you want to be focusing on capital growth during this phase and achieving a yield that is balanced enough to ensure you can continue to purchase more properties and are not in financial stress. It should be obvious by now, but just to reiterate, yes you will likely be negatively geared for the initial part of this phase… but this will improve over time as the growth on your rental income compounds (yes your rental income also benefits from compound growth in the same way!).

Please remember that the emphasis here is on building as large of an asset base as you personally can - the focus is not on the number of properties, it is about the value of those properties. Someone who has three houses worth $800,000 each has the same asset base as someone with six houses with $400,000 each (i.e. $2,400,000) … That is not to say that one approach is better than the other as your income will largely dictate what price bracket of properties you focus on, but there are many buyer's agents and content creators online who brag about having a large amount of properties or saying the goal is to reach [X] amount of properties where the emphasis should really be on how much your portfolio is worth in value because that is the number that compounds over time.

It is also important to remember that the accumulation phase is not made up entirely of you just purchasing properties all the time, there will be large periods (i.e. months and years) over this phase where you won't be buying anything as you will have no borrowing capacity and instead you will just be sitting on the sidelines whilst compound growth does its thing and multiplies your wealth. I know you may watch some YouTubers who are buying properties every year, but unless you have an amazing job or business, that is just not realistic - accumulating a sizeable property portfolio takes time, so please adjust your expectations.

Now you are probably wondering well how long do I need to be in the accumulation phase for? How do I know what asset base I need to build before I can move on to the next phase?

The answer to those questions is dependent on your answer to the following:

(a) What is your goal with property investing?

Everyone's goals are different, with some being more ambitious than others, but generally speaking the goals I hear about most from investors are one of, or a combination of, the following:

• Goal 1: I want to use property investing to generate enough passive income (e.g. $150,000 per year… adjusted for inflation) so I can have the retirement I want; and / or

• Goal 2: I want to use property investing to accumulate enough money so that I can pay-off / buy my dream owner-occupier home (how much is your dream home going to be worth?).

The more ambitious your goals are, the more aggressive you will need to be during the accumulation phase to ensure you achieve an asset base that can achieve the goals you have set.

(b) When do you want to achieve your goal by - i.e. what's your timeline?

In the same way that everyone's goals are different, everyone is also starting their investment journey at different times and / or with different expectations on when they want to achieve their financial goals by.

For example: are you in your late 20's / early 30's with no plans to retire until you are in your 60's (i.e. more than 30 year investment time horizon)? Or are you in your 40's and wanting to retire in the next 15 years or so?

The earlier you want to achieve your goal by, the less time you have for compounding to assist you and therefore the more aggressive you need to be in the short-term.

In a perfect world, I would be able to jump on a call with you and we could reverse engineer your goals so we know exactly what asset base you need to achieve your goals and when you could realistically achieve it by - but unfortunately that is not going to be possible as I have a full-time job and I am not (yet) enough of an excel wizard to give you a free spreadsheet either (the property courses I mentioned previously contain content like this that can assist you…hint hint).

Instead, I will share some great YouTube videos that you should watch that will help you get a ball park idea of how to achieve your goal.

With respect to Ravi's video, I would watch the whole video but take a look at what he describes as "Option 2(b)" where you can see that an asset base of $3 million which is then left to compound for 20 years can get you a $150k passive income with no debt. This is not financial advice, but this is a solid starting point in my opinion - so if you want to retire faster than this and / or you have more ambitious financial goals (i.e. you also want to pay-off your dream home etc.) you know you need to go more aggressive than this in your accumulation phase (or let compounding do its thing for a few more years…).

Joe Tucker’s video, the one in the middle, also explains it very simply and the formula he provides is quite easy to understand.

You can also use resources such as Zapiio which help you model out how long it may take you to achieve your goals and how much of an asset base you will need to achieve it - you get access to this for free with a HtAG subscription by the way…

DO NOT GET OVERWHELMED!!

If you have read the above and your head feels a bit scrambled please remember the purpose of this section was just to give you some context on what the first part of your property investing journey should look like - I am by no means saying you need to have this all figured out before you start investing in property.

Instead, before you get overwhelmed with trying to figure out how to map out your entire financial future here is my general (and non-professional) advice: don’t let the fact that you don't know exactly how to achieve your financial goal, or even what your exact financial goal is, delay you from taking action and investing now. As they say: "the best time to invest was yesterday and the second best time is now."

I know there are probably some financial gurus out there losing their mind at that statement and ready to call me negligent (noting this is not financial advice anyway…) - but the reality is that the only thing you will regret more than not starting your investing journey until you know exactly how to reach your final destination is not starting at all. Your financial goals will change over time as your life changes, and the reality is if you have zero or only a few properties whilst you are reading this you will most likely need more than that to reach financial freedom anyway (no matter what the goal or timeline is)… so you know what direction you need to be headed in - go take action and start accumulating.

I know there are plenty of analogies people will use to say the above is a ridiculous statement, but I am not saying don’t figure out your financial goals before investing - if you know what you want to acheive then yes map it all out, that is obviously the ideal option, all I am saying is don’t not take action because you aren’t 100% sure what goal you are trying to achieve or each exact step to get you there.

Get a general idea of what you are working towards, talk to your team (i.e. mainly your broker and accountant) to figure out what yield you are targeting and what structure you will purchase in to ensure you can keep building your portfolio - then go buy a good asset…

One caveat here, if you are older / later in life and retirement is fast approaching then yep you may need to be a bit more intentional here - go see a professional (and no I don’t mean a buyer’s agent or some dodgy financial advisor who shoves some silly securities product in your face, go see a professional who can do some modelling for you - i.e. the James Wrigley’s of the world).

Consolidation Phase

Once you have built your portfolio of bread-and-butter properties and have let compounding work its magic so you have achieved the asset value you need to reach your financial goals it will be time to consolidate your portfolio in order to:

(1) Reduce your debt position

Whether or not you decided to go interest-only throughout the life of your investment journey, your properties will still have a mortgage attached to them. Therefore, in order for you to enjoy / plan your retirement you will need to either fully pay-off or significantly reduce this debt (depending on your personal circumstances).

(2) Improve your cashflow position

Residential real estate is fantastic for capital growth but it is not renowned for its cash flow, and whilst it sounds great to say you have a property portfolio worth $[x] million - you can't pay the bills and fund your lifestyle with capital growth, you need cashflow.

Typically, at the end of the your consolidation phase you should have a low debt position (ideally no debt…) and a significantly improved net cashflow position which reflects the passive income goal you are aiming for in retirement.

But what does this involve exactly and what do we mean by consolidate? Well that depends on what your exit strategy will be. Again before I explain some of the most common options, you do not need to know exactly which path you want to go down… I am just giving you a heads up on the options that may be at your disposal if you accumulate enough assets.

Exit Strategy

Strategy 1: Sell down all / or some of your residential portfolio and purchase commercial properties

As mentioned, the net yields on residential properties often are somewhere between 2% - 4% which does not offer you very good cashflow for retirement. However, commercial properties generally offer net yields of around 5% - 8% which is often sufficient for you to retire on. By way of example, on a $3million asset a 3% yield translates to around $90,000 per annum, whereas a 6% yield is $180,000 per annum.

For reference, the capital growth potential on commercial property is not as a good as residential property which is why you don't start with commercial property on your investment journey but you can pivot to it as an exit strategy.

The banks are not as lenient when it comes to borrowing to purchase a commercial property, meaning you need a much larger deposit (30% - 40%). Commercial properties are also often more expensive than your typical residential investment purchase (i.e. the good ones cost anywhere from $1million to $8million or even more). For this reason, people will often need to sell all or a portion of their residential portfolio so that they can accumulate enough money to get into a commercial asset (some people can even purchase one outright or close to it depending on their portfolio size).

It is important to note that generally speaking commercial property is more risky than residential property, particularly with respect to vacancies as they can sometimes be without a tenant for 6months or even a year. Unfortunately I am not going to cover purchasing a great commercial property for retirement on this website as I am not very familiar with it - but there is plenty of great content out there on YouTube (but chances are if you are reading this website you aren't quite at this stage just yet).

Feel free to check out the below video for the differences between commercial and residential property for those interested.

Please also remember that you don't need to just pick one of these exit strategies, you can combine them as needed depending on the size of your portfolio and financial goals. For more information on planning your exit please check-out the below video from Luke Wiles which I think gives a good overview of these exit strategies, plus a few others.

Before we move on to the next phase I wanted to quicky flag a few key points here:

• All of these exit strategies are property related, you don't need to choose any of them - you could also choose to completely (or partially) exit property at retirement and pivot into something like shares, that is a conversation for you and your financial advisor at the time!

• The above has been written without taking into consideration that you may have other assets in your investment portfolio such as your superannuation, business income or a share portfolio. Meaning it may not be necessary for you to plan your retirement relying fully on investment properties as I have described above.

Freedom Phase

This stage is pretty simple but I have added it in for completeness - it’s freedom. It’s when you’ve got enough passive income to cover all of your expenses and your desired retirement lifestyle. It’s essentially where you want to get to.

Freedom and retirement will look different for everyone - depending on the age in which you reach this stage you may want to work a bit still, travel the world full-time or just sit at home and live a simple life with family, it's up to you!