3 Stages of Property
Ed McKnight looks at the three key stages of property investment and how to make them best work for you.
28 May 2023
The way you use property changes throughout your life. There are three distinct stages:
- starting blocks
- running the race
- crossing the finish line.
And within each stage, there are set steps you need to take. That’s the premise of my new book – Wealth Plan: How to invest in New Zealand property and retire on real estate, written with my co-author Andrew Nicol.
Here’s what happens in each stage.
In the starting blocks, you need to buy your first home and build enough equity so you can purchase your first investment property.
That’s because the primary way investors grow a portfolio is by using the equity they have in their home as the deposit for a rental. They don’t save up a cash deposit.
But once you buy your first home, how do you build equity?
The first option is to pay off your mortgage aggressively. This tends to work for career focused Kiwis who prefer a hands-off approach to property.
Or you can take the hammer-wielding approach and renovate your home to increase its value.
Taking one (or both) of these approaches will help grow your equity faster and move you closer to the “running the race” phase.
Running the race
In this phase, your goal is to grow an investment portfolio of multiple properties. And you’ll do this because this is the stage where you calculate your wealth gap.
You see, everyone wants to skip ahead to the third phase – “crossing the finish line”. That’s where you earn a passive income and live off your property portfolio.
But to do that, you need equity. You need wealth. And Kiwis who are at the beginning of their investment journey don’t have a lot of wealth (yet).
But that raises the question, how much wealth do I need? And how many properties do I need to buy?
That’s the purpose of figuring out your wealth gap. This is where you calculate the amount of wealth you need to achieve your ambitions … and how much wealth you’re currently on track to create.
If there’s a difference, that’s your wealth gap.
For example, if you want to live on a passive income of $100,000 a year, you’ll need to have $2.5 million in net assets to make that happen. That assumes a 4% net yield.
But then, let’s say you run the numbers and see that your KiwiSaver and other assets will only be worth $1.5 million by the time you want this passive income to start.
Then you have a $1 million wealth gap. Unless you build more wealth, you won’t be on track to live the lifestyle you want.
And that’s where you run similar calculations to determine the number of properties you need.
To help you do this, the book has its own companion software which does the number crunching for you.
Because once you know you need to buy three properties over the next 20 years, you’ll have the confidence to do it.
But that’s not the end of the running the race phase. Not only do you need to buy rental properties, but you need to set your investment properties up for success and continue managing them over time.
Then, once you’ve closed your wealth gap, you can move on to the final phase.
Crossing the finish line
This is the final stage of investing in property. It’s where you use the equity within your properties to build a passive income.
There are two ways to do this – the Nest Egg strategy and the Golden Goose strategy. We’ll focus on the Golden Goose in this column since it’s the least well-known.
The goal of this strategy is to buy two to four high-yielding properties without a mortgage.
This means you can live off the rent from those properties. Every fortnight you’ll have income hitting your bank without you having to go to work for it. The hard work has already been done.
You’ll move away from investing in houses and townhouses to make this happen. These properties tend to grow in value quickly, but the cash flow isn’t good enough to make the crossing the finish line stage work.
Instead, you’ll invest in higher-yielding properties like room-by-room rentals and dual-key apartments.
Take the above example. The investor wants a $100,000 passive income, and we said they’d need $2.5 million of net assets. How do the numbers work?
If you target a 6 per cent gross yield, that $2.5 million of property should bring in $150,000 of rental income per year.
But you still need to pay your property manager, the rates, insurance, maintenance and your accountant. Plus, you also need to know that your properties won’t have a tenant 100 per cent of the time.
These costs typically total 1.5-2 per cent of the property’s value. Roughly $37,500-$50,000 in this case.
Once you take these costs away from the rent, you have $100,000-$112,500 a year in passive income that you can live off.
The way you invest will change
The way you use property will change throughout your life. You might start by buying your first home and renovating it while you’re in the starting blocks.
You then might transition to a more passive strategy when you’re running the race and building an investment portfolio.
And then, you’ll transition to yield-based properties in the crossing the finish line phase to earn your passive income.
But there’s more to each stage than what can be covered in a single column.
Throughout the book, you’ll get other actionable tactics, like:
- The Fast 5 – the five ways to build your deposit (fast).
- Cashflow Hacking – the six cost-effective steps to renovate and add value to your property.
- The 8 Principles of Capital Growth – the factors to look for when finding properties that increase in value quickly.
This book doesn’t just tell you what you need to do. It guides you through the process of actually doing it.
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