Episode 009 | Investment Planning – The Importance Of Having A Plan
Smart investors start their journey with a plan. Join Damian and Arin as they discuss the merits of long term investment planning. If you want to retire comfortably and/or achieve financial freedom, the surest way to get there is to have a well-thought out investment plan that spans several years and that keeps you on track and accountable. Find out what a plan should contain and how you go about creating one for yourself.
Welcome to episode 9 of our property investing masterclass
Tune in and Learn:
- How can investors build large property portfolios?
- Why is a property investment plan so important?
- 4 main considerations when building an investment plan
- How to kick-start your investment journey right now
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NEVER MISS AN EPISODE
Damian Collins, Momentum Wealth: Having this investment strategy, putting a plan in place, financing your properties… In the longer term will provide higher yields than you will in the city because they carry… From an investment point of view, you’re probably not going to get the same growth as you would if you bought something older.
Property Investing Masterclass
Arin Di Camillo, Momentum Wealth: Welcome and thanks for joining us for episode number nine of the Momentum Wealth Podcast Series. My name is Arin Di Camillo, manager of the Property Wealth Consultants at Momentum Wealth. And I’m joined as always by our Founder and Managing Director, Damian Collins. D.C., thanks for being with us.
Damian Collins, Momentum Wealth: Good to see you again, Arin.
Arin: Thanks D.C. and as always, we kick off the episode by reminding viewers that the property fundamentals – it’s not just about finding a great property.
Damian: No, it’s not, that’s a really important part. We would never want to downplay that, that’s a really important part. But if you don’t have the right strategy in place, the finance, looking on how you can value-add to your properties, develop properties – and also looking at commercial as well as residential there – and the management of your properties… that’s the really… all those things go together, all those ingredients go into building a large property portfolio.
Arin: Sure, so, this week we’re looking at investment planning and strategy and how important that is to building a large probably portfolio. So, we’re sort of taking into account everything we discussed in the previous eight episodes and now wrapping it up so that we can put it into a plan and help people create long-term, sustainable wealth. As always, we have a bonus at the end of the episode where I’ll reveal at the end of the episode what it is. So, stay tuned and we’ll fill you in then. You’re ready to get into it?
Damian: Ready to go.
Arin: Very good, so just to recap we’ve covered a lot in the first eight episodes, everything from the amount of supply drivers; the fact that land goes up, buildings go down; we’ve talked about the buy and hold strategy; asset selection; new vs. old; we’ve talked about commercial developments. We’ve also touched on property management and financing. We’re going to throw that all together today and talk about investment planning and how important that is to start right at the beginning of your investment journey. So, Damian, first of all owning one property is not really enough to retire on is it?
Damian: Certainly it’s not, Arin. When you’re looking at investing, let’s say you had one investment property worth $600,000 paid off in full, no debt. And that’s great, you get your home paid off, that’s awesome. And you’ve got 600,000, … so it’s getting net 3% which is about maybe two and a half to three. That’s still only going to get you somewhere between $15,000 and $18,000 income a year. And that’s nice, but you certainly can’t live on that. Now you think, “Oh, well maybe I’ll get a pension as well.” But we’ve got this thing in Australia called the assets and income tests. And so, just having one property… by the time they take off the assets, look at the assets and income test, it’s not really going to… it’s better than having none, certainly say that. But it’s a long way off from where you really need to be in terms of having enough wealth to live a retirement that most people want to actually live.
Arin: So, that’s important to build a large property portfolio, important to plan for it at the start. How do we go from one to two? How do we buy successive investment properties?
Damian: Well, it starts, I guess, at the beginning and it’s got to be the, you know, the right strategy for you. Everyone’s strategy is going to be different, there is no magic formula, you just do this and this… everyone should do exactly the same. It’s about building that portfolio and most people will find that… sort of talking there about getting from one to two, most people are going to get to their next property from the wealth that they’ve got in their first one and probably their home. That’s how… Most of us aren’t very good savers and it’s about the wealth creation from those properties that we have that gives us enough equity to get into that next one.
Arin: So, you’re talking about the equity in that first property. Now there is a difference that sometimes people confuse with… in terms of net worth and actual usable lending equity. Do you want to just explain the difference between those two for us?
Damian: Yes, I know it is confusing, so a simple example would be… Let’s say you own two properties worth half a million dollars each. And let’s say the debt is $250,000 each of them. That’s simple, so you’ve got a million dollars of property, half a million dollars of debt, your net physical net worth is half a million dollars, you’re worth half a million dollars. Now when you go to the bank though, they’ll say, “Well that’s nice but that’s not your equity or half or net worth $500,000,” they won’t lend you that whole amount. They will lend… we’ll stick with 80% just for the purposes of this before we go into mortgage insurance. And they will lend you… they’ll say, “That’s $300,000 of equity available, lending equity.” So, there is a difference. You can’t unfortunately. [It would] be nice if the banks would give us 100%… of what our properties’ values are worth, but they won’t, they’ll only give us generally 80%, or we might be able to go to 90% potentially but…
Arin: So, we need to start with our growth property to build that lending equity that we can use for the second. It makes that first property investment and getting that right investment really important, doesn’t it?
Damian: Yeah, absolutely I’ve only had to save for one deposit. Everything else subsequent to that has been equity growth or when I was developing wealth creation through that. So, if you don’t get that first property investment right, that’s where you can really set yourself back. And you know, we’ve modelled it out and… if you get that first property right and continue to make smart choices, it can mean you can get to your retirement goals sometimes in 10, 15 years easily earlier than other people might get there.
And in some cases if you buy the wrong property and that was a bad performer and you think, “Oh, well, does that really happen?,” well it does. Well, I’ve seen properties, you know, bought on the Gold Coast for example that 8, 10 years later are worth less than what they were when they bought them. So yeah, you can… if you get it wrong in the first instance you could be, unfortunately, you know, particularly since most of us aren’t very good savers, you might not get you’re your second one for 15, 20 years, which is just going to really put back your plans and ruin your plans really.
Arin: D.C., going back to the planning side of things, sadly most investors… while they know they need to invest in property, they don’t actually put together a strategic plan at the start of their journey, do they?
Damian: No, they don’t Arin. I guess that’s evidenced in the stats. If you ask most people would they like to build a large property portfolio – or property investors – then they would say yes. But the stats are that only 73% of people only ever get that one property. It’s only a small percentage of the people that get to that five or more which is, in terms of residential context, that’s what we’d be saying you’d want to get to.
Arin: So, putting that plan in place at the start is vital for the investment journey?
Damian: Absolutely, because it sets you on a path. And look, a plan is not a static document that just sits there forever, because the market changes, your life circumstances change. But lay out exactly when you want to… where you want to get to, when you want to get there and then you’ve got some steps. At least you know what you’re doing and you’re working to something. It’s like anything, you’ve… businesses have plans, a lot of people do health training plans and, you know, a plan will help you set the goal. And just sitting down and actually doing a plan, studies show you’re far much more likely to actually get there by actually doing a plan in the first place.
Arin: So, when we look at an investment plan there are four main areas that we look at just very broadly speaking. But we’ll go through them in a second, I’ll get you to go through them in detail. So, first of all, we look at your goals, your finances, your risk profile which is important, and then finally your life circumstances. So, starting with your goals, what are we talking about there?
Damian: So, really we’re asking people what are their goals. And it’s not always… properties obviously….you know, people will buy property, it’s great and we love it and you can touch it and feel it.
But ultimately, it’s a tool to help us make money and provide us with an income stream or… but it’s not always about retirement. So, we do ask people about, “So what are your goals?” And it’s… for some people it’s to retire at a certain point in time. But for other people they have other goals, they’ll say, “Well, I want to do this or, you know, travel around the world for two years,” or something along the lines of that. So, we’re willing to develop a plan, we’ve got to understand what their goals are and when they want to hit those particular goals. And for most people it’s around wealth, they’ll say, “I want to, you know, reach a certain amount of net worth by a certain time. And I want to get this sort of income stream from my properties over… and live off the income from that property.”
So that’s… most people’s goals are around longer-term finances. But yeah, we sit down and try and find out what their goals are. We’ve got to know where we’re trying to get to.
Arin: Sure, so we establish the goals up front. And then we go into the second part which is the finances. And it’s looking at household budgets and looking, you know, at their own individual cash-flow which will influence what type of investments we go for.
Damian: Yeah, so, we will ask people to… well, you know, we don’t get into how much do you spend on takeaway food and stuff like that, we’re not budgeters, we’re not… but what we do is we’ll say “Well what’s your household expenditure?” We go through their income, their expenditure and then take into account properties that they have and properties that we might want to add to their portfolio. And that… and then we’re… obviously, our finance team working with their property investment strategist will figure out along that journey when we expect that they’ll be able to buy additional properties.
Now of course, again, these are goals and strategies, [but] the finance markets could change, their life circumstance could change. But it’s having an idea of where we’re going. And they work very collaboratively to make sure that they’re in a position to be able to finance those properties that we’re looking to buy.
Arin: Part three or the third part that we’re looking at is the risk profile. We conduct a risk assessment of the client and that’s an important part of the process.
Damian: Well, that’s a hugely important because again not all… there’s not one magic property investment strategy. Why do some people make substantial amounts? There [are] people who’ve made hundreds of millions from property doing their own development. But developments are very risky. And so, if a client is really worried about, you know, cash-flow and… we may not buy them that, you know, that potential development site that they can rent out for three or four years because they might have really low cash-flow and a lot of maintenance and repairs. It might be something newer that’s going to be a bit safer for them, less maintenance, better tenants and all those sorts of things.
So, the risk profile is an important part because we don’t want to put people into properties and investments that they are nervous about. Look, any investing, even buying a passive property, there’s an element of risk to it, there’s no doubt about that. But it’s… so nothing is risk-free, but we want to make sure we’re building a portfolio around the tolerance levels, the gearing, how much debt they’re comfortable with. That’s what the plan is around, it absolutely takes in account their risk profile.
Arin: The final part of it, the fourth part is around life circumstances. And you might be in a position where, say, you’re soon to get married and have to spend money on flowers for example, which might inhibit your investment ambitions for that year. It’s just a very important thing we need to take into account.
Damian: Look, it is. Yeah, I mean, it’s about… you know, we ask people, “What… Is anything in your circumstances likely to change in the next few years?,” and a couple say, “Well, we want have a baby, for example, in two years’ time.” And that means that someone’s going to be out of the workforce. All those sorts of things come into account, and again we can’t predict the future with 100% certainty. But we try and tailor it as best as we can around the individual’s life circumstances. And what may be happening as far as they can foresee, of course there’s nothing… nothing is certain.
Arin: So, like you said, there is no one-size-fits-all, it’s basically tailored to each individual’s needs. But one thing we do need to build into any investment plan is cash buffers. And that would depend on the circumstance of the particular investor.
Damian: Yes. So, certainly we… what we want to do is build into that circumstance… it’s, again, risk mitigation. So, there’s a couple of ways that we minimize risk. You can’t minimize all risk. But… well certainly one is insurance and I would recommend anybody who’s going into debt gets life insurance income protection. Insurance and those sorts of things, that’s very important. But certainly also you can’t generally insure against unemployment, you know. So, what you’re looking at is cash buffers set aside, living expenses for a few months. Let’s say a tenant property comes vacant for a few months, that we’re setting aside enough cash there that we’ve got… you know, if these things happen that we’re not going to be in a dire financial situation.
So putting aside some cash buffers is absolutely an important part and again that will depend on the person’s risk profile. And if there [are] two working and, you know, both probably won’t lose their job at the same time. All those things come into play, but yeah, we do recommend setting up cash buffers for sure.
Arin: When we’re doing forecasts as part of our investment plan, we put in some fairly reasonable assumptions about the growth rates. We tend to use around about 5% in a lower-cast scenario and about 8% in the higher scenario.
Damian: Yes, so we model it on 5% and 8% and they… quite substantially different scenarios they are. And of course, there is no… no one can predict the future with 100% certainty. So, we sort of try and give, you know, a moderate case and a little bit higher case. And… But then the clients can see, it just shows the difference in… again it does reinforce every time I look at those plans, wow, the importance of selecting the right property, because that couple of percent means people are getting into their journeys 10 to 15 years earlier.
So… but of course we can’t control the market, we can only control getting the best properties possible within that market. So, we go on a lower-case scenario and so even if the market goes softer than, you know, it historically has over the last 30, 40 years, well then, we still know when we’re going to get to that particular point in time as well.
And of course, the market doesn’t go… you know, in financial modelling… over that time, let’s say if the market did go up 8% per annum, [it] never goes in a straight line at 8%; some years it’ll go up 14 and some years it will go up two or three. So that’s importance of regularly reviewing those plans. But for financial modelling we’re modelling it up… we need to… we can only model on a straight line because we don’t even… we can’t even be 100% certain what the growth rate next year is, let alone 5 or 10 years away.
Arin: One of the interesting byproducts of our investment plan, our property wealth plan as we call it, is that it’s helped people stay focused on their investment journey and not be bothered too much by white noise in the media and their neighbours having their own commentary on the property market.
Damian: And that’s really important, that plan does it because you know you’ve got a goal, you know you’re on the journey. And the journey is… you know, the property is not a ‘get rich quick’ investment. It’s generally outside of rare boom times which happen once every 25, 30 years. Generally, it’s a pretty steady sort of growth and some years flatter and some years a bit better. And so, you know, there’s a lot that can go on, and the other stat is, you know, most people are only holding investment property for three years. Then they get out of it, that’s the worst possible time. That’s just when you starting to come in to some wealth. So, the plan will set the goal… we’ll set the… they’ve told us their goals, we’ve set the plan in place, keeps their eye focused on it. When you have a downturn in the market, maybe rents are down, maybe prices haven’t gone up for a while or even gone backwards, which will happen in a long-term cycle, you’re going to have couple of years there guaranteed where you might see little to no growth or even go backwards a little bit. So, the great thing about a plan is it keeps your eyes focused on the long-term goal, and that’s what sets the successful investors apart from the others, is sticking… they’ve got a plan, got a good investment asset, they stick with it and hold on to it for the long-term.
Arin: So, we’ve got a plan in place and we’re sticking to it, but that’s still not quite enough. The importance of regularly reviewing that plan and adjusting it depending on how your lifestyle changes and circumstances change, that’s just as important as having a plan.
Damian: It’s hugely important. So a plan, a property long term… it’s a long-term aspirational target. But guaranteed, as I said earlier there, it will not go up [in a] straight-line, every 5% every year. And your life circumstances won’t stay exactly the same. It’s… well, things will change, you’ll have career changes, job changes, hopefully get paid more money. You know, things can happen in life so the point of it is that every time that you come to… [when] you’re ready to buy your next property and when you’re in that position is to reassess your life circumstances, reassess your risk tolerance and your risk profile might change too.
You’re starting out and you go, “Oh I’m not really confident. I don’t want to take too much risk,” and then you get more comfortable with it. You might say, “Now I’m in a position… I feel more comfortable, I’m willing to take a bit more risk,” or you know, things… those sorts of things in life. Or you might become separated, sole income, you might feel less willing, inclined to take a risk. All those things go into play. So yeah, absolutely a plan, a 20-30-year plan absolutely needs to be reviewed. And look it certainly… at least every couple of years, maybe even every… – depending on how active you are – maybe more regularly. But certainly at least every couple of years to be reassessed and look at where you’re at along that journey.
Arin: So, we’re just about out of time for this episode, D.C. But I want to give the viewers something tangible to take away for those at their start of their investment journey. What are some of the things that people can do when they sit down and start actually mapping out their investment plan?
Damian: One of the good things about it, Arin, is that when we sit down with clients is it makes them have a look at their household income and expenditure. So, we’ll sit down with them and they start to look at… It’s amazing, you get sometimes get people on hundreds of thousands of dollars who think they can’t save any money. And other people on $80,000 who can save substantial amounts of money. So it gets people to have a look at their budget – and as I say, we don’t go into that line by line – but it makes them, the family and or the couple, or the single person have a look at their budget, where is their money going and… Look, we’ve had clients who’ve said, “You know what? I’m looking at all this money I’m spending. You know what? If this means I’m going to get to my goal another 10 or 15 years sooner, I’m going to maybe ditch that part of my spending. And if it means an extra investment property…”
So, it gets people focused. Ultimately, it’s their choice, they can save as much or as little as they want. We’re not going to tell them that, but we just go through and that really makes them assess their current situation and household spending and maybe some of the things they can do to maybe save a little bit more money and how much they’re willing to put into property.
Arin: So, it’s really about having a look at where they are now and then getting some idea of where they want to go?
Damian: Yeah absolutely.
Arin: So, you mentioned before about the discretionary income part of it, it doesn’t necessarily matter if you’re high or low income earners, it’s still something you can plan for to achieve some wealth for a property investment.
Damian: Look Arin, we’ve got… as I said we’ve got clients on moderate incomes right through to very high incomes. And when I look at it, it’s often about the person and their own family circumstances. A single person on $80 grand might certainly have better savings capacity than family who’ve got kids and a lot of other commitments who are on a combined $200,000. So… But also it comes down to that discipline and, you know, people’s lifestyle expenditure. So, yeah, I mean, anyone from a reasonable income onwards can certainly build a decent portfolio if they’re committed and dedicated to it.
Arin: Once you’ve got an idea of those factors I guess then it’s about sitting down with a good property investment mortgage broker and start working at some finance structures.
Damian: Yeah, definitely. So that’s the next step is… Part of that process is figuring out obviously your borrowing capacity, because that’s ultimately for… when we’re accumulating our wealth through property, that’s… you know, we need to be able to borrow the money because we don’t… So, that’s obviously a very vital part of it as well.
Arin: Excellent. All right. So there you have it, some great tips for people who are starting on their probably investment journey. Thanks again D.C. for your time.
Arin: We appreciate it as always. Thanks again for tuning in. I hope you enjoyed this podcast, and we look forward to your company next week.