Have you ever wondered what property goals the average investor is striving to achieve?
And whether your goals are conservative or ambitious by comparison?
Well I’m going to give you a peek behind the scenes into the 2 most common property goals I hear from beginning investors and the 2 most common property goals I hear from experienced investors.
An open question that I always ask my clients during initial strategy sessions is – ‘What is your end game?’
Reason being is that I want to understand the clients’ long-term goals, their risk profile, whether they are being conservative or ambitious, whether their goals are realistic based on their timeframe and financial circumstances and of course whether or not I can assist.
The end game for most if not all clients is a level of financial independence however in probing further I most commonly hear one of the following goals.
Most common beginning investor goals:
1. A property portfolio that generates $100K in passive income per year
This is by far the most common property goal I hear from my clients and it is fair to say that close to 60% of clients I see, express that they aspire to have $100K in passive income to be financially independent.
Perhaps $100K is a nice, round number.
Perhaps they are keeping it simple for the purpose of the exercise, but there is no doubt that this is the most common goal I hear.
So, what are my thoughts on this goal? Is it realistic? Is $100K enough? Are they being conservative or ambitious?
Let’s start from the beginning, is this goal realistic? Yes, as long as you have allocated enough time to see your investment grade assets grow and compound.
And as long as you have the financial capacity to begin and continue this journey safely.
Is $100K enough?
Well, how long is a piece of string? (Btw if ever asked that question the answer is ‘twice as long as half its length’, thank me later)
Note that the worst-case scenario for any Australian is that they end up on the pension upon retirement.
The pension equates to approx. $21K per year for individuals or approx.
$32K per year for couples living together.
This is certainly not enough for financial independence let alone day to day expenses and will only ever allow you to live a basic lifestyle.
It is fair to say that the average mortgage free Australian couple needs at least $40K – $50K per year upon retirement to live.
Notice I said to ‘live’, this is not living comfortably or living with luxuries.
You may be earning slightly more than pension but you would still be living a very modest lifestyle with low-cost activities.
So, back to $100K, is $100K enough? Yes, if you are a mortgage free couple with generally conservative spending habits and lifestyle than $100K will allow you to cover your day to day expenses with a few small luxuries thrown in such as traveling once or twice a year.
However, if you wish to channel your inner Mariah Carey upon retirement and live your days sipping champagne by the pool, shopping on Rodeo Drive and calling everyone around you ‘darling’, then you may want to think about being a little more ambitious.
It’s also important to determine if your goal is $100K gross or $100K net as they are very different goals and accordingly would require different asset base targets.
2. 4-5 investment properties by retirement age or financial independence age
I must be direct and say that I never agree with a property goal that is tied to owning a certain number of properties.
It is important to note that the number of properties you own does not determine your wealth or net worth and accordingly it is irrelevant.
What is important however is the size and value of your asset base and quality of assets within your portfolio.
I could tell you that I have 10 properties worth $100K each, or 10 properties worth $1M each.
They are two very different propositions that yield very different results.
I would prefer your goal be an asset base target as opposed to ‘x’ number of properties e.g.
I would much prefer your goal to be a $3M – $4M asset base of investment grade properties by retirement age.
This is a much more relevant goal as you can then equate it to wealth or your net worth.
Most common experienced/sophisticated investor goals:
1. A property portfolio that generates $200K in passive income per year
As per above, and given that the average mortgage free Australian couple needs $40K- $50K per year to live, then $200K is a very healthy passive income goal and will allow you to live a very comfortable lifestyle.
Again, important to determine if this goal is gross or net.
Keep in mind, that when calculating the passive income you may need upon retirement, you should not be comparing yourself to others but be looking at your current income and lifestyle.
How much passive income you need to live comfortably is only relative to your existing lifestyle and spending habits.
If you are currently earning an income of $400K+ and have been living an extravagant lifestyle, then no, $200K is not enough for you.
My suggestion is, when determining your passive income goal, you should be attempting to supplement your existing income and then aim a little higher – if time and finance allows of course.
2. Complete a development project or purchase a block of units
Now it’s important to note that most experienced and sophisticated investors have already achieved their passive income goals and accordingly should only be investing like they do not need to.
If you do not need to invest then you should only be proceeding with blue-chip investments that are the absolute highest and best use of your funds – investments that would return incredible results.
There is no doubt that at the upper end, the two most common property goals are to either complete a development project of a side by side townhouse (duplex) or purchase a well-located boutique block of 4 units or 6 units that has potential for value add via a large-scale renovation.
I will not be getting into the details of the above strategies however I intimately know the numbers and potential for wealth creation in both strategies.
They are both goals that I agree with and would be recommending to high net worth clients that have the capacity to fund these investments.
In summary, property goals are not as simple and clear cut as they appear to be.
There are a number of different variables that must be considered including; your income or joint incomes, timeframe, serviceability, spending habits, lifestyle, risk profile, future plans, knowledge of property or investments, to name a few.
Yes, the above has given you a point of measure or comparison but you should only be comparing yourself to yourself as everyone has a unique set of circumstances.
If you would like assistance in articulating your property goal or end game then feel free reach out to the team at Metropole for an obligation free consultation.