Episode Details

How many properties do you think you need to own to generate enough wealth to fund a comfortable retirement? Most people think they need more than 3 properties to become independently wealth.

Of course, the answer will be different for everyone because it depends on your income, existing assets, time until you retire, goals and other factors. However, having been involved in developing hundreds of investment strategies (possibly more than a thousand), I can tell you that 90 per cent of people need to hold somewhere between one or two investment-grade properties. It is unusual for an average person to need to invest in three or more properties.

Quality is the key

Indeed, the number of properties is not really the most relevant measure. In fact, its meaningless. More important is the quality of the assets that you own and the amount of equity you have in them. I would prefer to own only one sensational investment property compared to three average ones.

Maybe it’s a sales pitch

Some books and property promoters suggest that investors should aim for acquiring a portfolio of more than three investment properties. However, I fail to see how this could work and think this is a high-risk approach.

You either have to acquire several low-value properties (and are therefore you are likely to compromise the asset quality, meaning they aren’t investment-grade) or, if you are buying investment-grade property, you must borrow a significant amount of money. I have seen profiles of investors (in property magazines) who have $2 million to $3 million in loans when their family income is between $100,000 and $150,000 p.a. in total. This is a very high-risk approach and a recipe for disaster in my opinion. Given the immense amount of credit tightening over the past 1 to 2 years, it would be difficult to access this level of financing anymore (which is a good thing).

Think about debt

Debt is a great servant but a very bad master. You must control it, not the other way around. Therefore, when borrowing to invest in property you must conservatively assess your capacity to be able to service the debt and sleep at night regardless of the variability in interest rates and repayments.

Also, you need to have a debt exit strategy. That is, how will you repay the debt when you retire? I typically like my clients to have little to no debt when they enter retirement because, at this stage of life, they will be very sensitive to interest rate changes (because their only income source is investment income).

Therefore, if an investment strategy involves borrowing a lot of money to invest, you must also develop a plan for how you will reduce debt before retirement. This might be achieved through gradual debt repayment funded from your surplus cash flow, the sale of investments on or after retirement (property or shares) or drawing a lump sum from super – or a combination of these things. The point is, you must have a clear debt repayment strategy.

Constructing your investment property portfolio

You need to consider a few factors when constructing or planning out what types of properties you will include in your property portfolio. These factors relate to diversification of your portfolio and include:

1) Diversifying geographically

Spread your properties among different suburbs and market segments, and even consider investing in different capital cities. The idea behind this is that markets do not grow uniformly so, by diversifying geographically, you will hopefully smooth your return (growth). Growing your asset value will allow you to access further equity to assist you in building wealth.