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Are you targeting the wrong properties?
This week I want to share a topic that unfortunately will ruffle a few feathers and may upset a few investors. But know it comes from a place of truly caring about your investment experience. When you mention a word like 'ego' you certainly can evoke a lot of emotion, and I apologise if that’s the chord that it hits with you. But I had breakfast with a gentleman this morning and this exact topic came up, and I thought it was really worthwhile sharing with you.
The gentleman explained a property he was about to buy and all the reasons why he was buying it. But none of it added up. If you’re looking to buy an investment property that is going to be your ticket to retirement, your cash stream in retirement, you need to get it right. Now, he described this property as a property he was going to live off in the future, and I thought there was a much better way to do it. When I showed him what I would do instead, he was blown away!
Now, when we talk about income as opposed to ego, if you imagine that instead of buying a property or planting a fruit tree, it’s always great to bring it back to something nice and basic. If what you’re planning on is living off those 'apples' in retirement, I can never see why most investors buy big expensive 'fruit trees' that produce very little fruit. The rent in comparison, the rental yields, are so disappointing. This gentleman, when we worked his rental yield out, was going to be close to 2% (2.1%) on this particular property. When I said to him that for the same budget, you could buy two investment properties producing at least 6% rental yield and both of the properties, when added together, was slightly less than the property he was targeting and instead of having two pieces of fruit, you’ve got many more pieces of fruit., much more rental income and a much higher cash flow in retirement - there’s a big difference!
Now of course, people think that these high yielding properties are going to be in some remote location. He was like, "Oh, I’m not going to some mining town" or whatever his preconditioned thoughts were about where those properties may be located. But when I mention a number of locations offering these sorts of rental deals, they are the most talked about locations by third parties, by independent reporters and creditable sources, making the top hot spotting list for many reports circulating at the moment, he was blown away.
I encourage you as an investor to think about why you are buying an investment property. If you’re buying properties with the goal of then helping fund your retirement, why would you take on properties that give you such low yield? You may end up having to have three times as much equity in your properties to produce the same yield at a much lower total value of property.
Strongly consider this.
And if the argument is, "well, those properties are going to get better capital growth", be very careful in making those statements. The properties that we talked about this morning (I think we mentioned six or seven locations) have tripled in value over the last 20 years. They’re currently some of the best hot spots in Australia. They can take the 'Pepsi challenge' with many postcodes in the best blue chip locations and yet you’re still able to get a 6% rental yield when you exercise the right strategies in those locations.
I hope this has given you a bit of food for thought.
And if your plan when you get to retirement is to cash in and sell that property, pulling out all of the profits you’ve now got in this blue chip location, be very careful. You're now considering cutting down the fruit tree and then you won’t get any more fruit.
If you’re buying in the right locations, they will continue to grow with time, and the more the value grows the rent will also grow, averaging the same yield over time. Property values and rents never grow at the same time but the rental return will average out over time. So even 10 years after retirement when the values have gone up, the yields will stay fairly consistent too. So you'll continue to get paid more and more as the years roll on.You don’t have to cut the fruit trees down, you can continue to pick fruit forever
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SEQ Big Shift Report
- OUT SOON!
Keep an eye out for my upcoming SEQ Big Shift report where I'll break down a number of key elements that are creating a 'perfect storm' for informed property investors in certain postcodes within the emerging hot spot for property investors.