Property Through Your Lifetime
If you want to build wealth through property, look at the age and stage you’re at now, says Andrew Nicol, of Opes Partners. Here’s his guide.
17 October 2021
With property prices booming around the country, many investors are asking: “What’s the right investment property for me?”
Of course, the right investment property will be different for everyone. Though, part of the answer can be determined by your age and stage in life.
The truth is the right property for you will change as you age. There are three stages most investors will pass through.
Planting – Getting the first seeds into the ground. (Young – under 35)
When you’re young and just starting on the property ladder, you’ve got to put in the hard yards. You’ve got to get your first seeds into the ground.
At this stage, your aim is to create ‘equity’. Put simply, equity is wealth that you can use to purchase investment properties later.
Generally, you do this in one of two ways.
The most common way is to buy your first property and pay down the mortgage. While you’re paying down the mortgage, your property is likely to go up in value.
Together, this boost over time and the amount you’re paying off allow you to move on to the next stage.
If you’re an ambitious ‘planter’ who wants to get through this stage more quickly, you can increase your mortgage payments to pay your home loan off faster.
Because they tend to be young, many planters have decent incomes and relatively low expenses. That gives them space in their budget to increase their mortgage payments beyond the minimum they need to pay.
Another path is to take an ‘active’ investment approach, which involves renovating properties to manufacture wealth.
If you go down this path, you might buy a property that needs some love, in an affordable area.
The standard playbook is to renovate it, revalue it, and then borrow against it again to buy your next property.
Growing – Building on the equity you have. (Midway through – 35-60
After a few years, planters move on to become ‘growers’. Having built a base of equity, they can expand and grow a portfolio.
Investors at this stage often begin thinking about their long-term wealth and financial future, which tends to coincide with a lifestyle change.
Imagine you’ve started a family. Your priorities begin to change and spending time with your partner and kids is at the top of your weekend plans.
You may have worked your way up the corporate hierarchy, taking on more responsibility and putting in more hours.
Suppose you’d previously taken the active approach and renovated properties. In that case, you may find your lifestyle has outgrown your previous investment strategies.
That’s why investors in this stage will invest in properties that grow in value more quickly. The investor’s focus turns towards capital growth.
That probably means investing in new or near-new standalone houses or townhouses in main centres.
These properties don’t take up much headspace at the best of times. They take up even less when you use a property manager.
The passive approach may mean that you’re not manufacturing equity, but that’s OK.
Rather than focusing on one of two properties as you may have in the previous stage, your equity base allows you to buy multiple investments.
Over the years, you’ll prune your portfolio – cutting properties that are no longer a good fit and reinvesting in those which fit your new life stage.
Harvesting – Enjoying the fruits of your efforts. (Later stage – 60+)
Once you start getting close to retirement, whether that’s 65, or earlier because your investments allow you to, investors will start thinking about income.
You’ve invested your whole life and made sound financial choices. Now it’s time to enjoy what you’ve built.
Instead of thinking about building your asset base, you use those assets to give you an income to live off.
And that’s where investors will start to transition away from properties that grow in value faster, to real estate that produces a better cash return.
In practice, investors will sell their portfolio of standalone houses and townhouses and reinvest that equity in room-by-room rentals, like student accommodation, apartments, or multi-income housing.
These properties won’t grow in value as quickly, but they provide a solid rental return after costs.
How to transition Your Portfolio
When moving between stages, it’s essential to give yourself time.
For instance, I began my investing journey with an active approach. I renovated properties where I could increase their value.
I then moved into the growing phase, years ago. But it has taken me over five years to remove the properties which are no longer a good fit for me and reinvest those funds into more appropriate investments.
Similarly, when I’m working with investors to transition into the harvesting stage, I’d usually allow another five years.
That lets these investors sell down their current portfolio at the right time while they’re buying properties that will serve them well in their next stage of investing.
What’s important to recognise here is that you need to diagnose which stage you’re in now … and age isn’t the only indicator.
What’s more important is the stage you are in right now.
Do you need to build an initial base of equity?
Can you grow a base of equity you already have in your current property?
Or are you now looking to generate an income from a substantial equity base you’ve created over many years?
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