investment strategy

10 Steps to Financial Freedom through Property Investment

Investing in property is a surefire way of achieving financial freedom, and indeed many Australians have benefitted from adopting this strategy.

According to the Australian Taxation Office, 64% of people that own investment properties have an income under AU$80,000 per year, showing that this investment strategy is achievable by all and not just the super-rich. Investing in property provides a steady source of income as well as long-term capital growth, which makes it a perfect income source for the golden years.

Finding financial freedom by investing in property requires a carefully thought out strategy. It is not enough to buy properties, but also to look at the value, the locations, and the type of property, i.e. an apartment, beachfront property, commercial property, or suburban detached house.  

It would be best if you got your head around all of the considerations of property investment to concentrate your wealth, as well as invest in other asset classes to diversify your wealth. Doing this gives you genuine financial freedom and the knowledge that your investment strategy is safe against any downward economic or market trends in particular asset classes.

We’re going to look at how property investments create financial freedom and the steps to take to make it a reality.

1.    Identify Your Financial Goals

To achieve true financial freedom, you must first know your financial goals.

Many investors invest in properties without clear financial goals and understanding where they currently stand and where they’d like to go financially. Identifying and writing down clear, and timely financial goals are essential, as this action creates a clear path to your dream.

You can note down pertinent points like:

  • The value of the property you wish to buy
  • How much equity you want to build
  • How much passive income you want to earn per month.

This step should not be skipped. It helps you to decide the type of properties to invest in, as different properties face different challenges and bring in different income amounts.

2.    Educate Yourself

Make it a point to educate yourself on the finer points of property investing.

With platforms like Talk Investing, you can become financially savvy and learn about all the ins and outs of property investment, including equity, tax, and finance.

Over the long term, your mindset and financial education will help you to create wealth without making catastrophic mistakes. Ignorance can be expensive, so armed with the knowledge you can make informed decisions that will see you invest in the right properties that suit your investment personality and appetite to risk. 

Many beginners invest in properties to only achieve cash flow. Educated investors, however, invest in properties to build, capital growth that gets them out of the rat race.

3.    Save For a Deposit

Most lenders will require a deposit to give you a home loan. Expect to pay a deposit of anywhere from 10 – 25% of the value of the property you intend to purchase. A higher deposit reduces the risk of the loan you’ve taken.

This step isn’t easy, but it is necessary.  Cut down on your spending and put money aside to build a sizeable deposit. You can even take on a second job to earn additional income for this very purpose.

Once you have your deposit, purchase the best investment property that your money allows, build equity over time and create your asset base.

4.    Purchase Your First Property

This first property purchased determines the direction of all investments to follow. Try to go for a property that outperforms the market averages in capital growth.

Seek the advice of experts if you don’t know how to identify such properties, and make sure you purchase properties in up and coming areas and not locations that are likely to lose your property value over time. Less than 5% of properties on the market are investment-grade properties – these are the properties that you should be looking to buy as first investments.

5.    Consider Risk Management Strategies

Every investment is risky, but risk management strategies can always be adopted to minimise the loss and damage that occurs should the market trends go downwards.

Such strategies include taking out landlord insurance, life insurance and income protection insurance, keeping the property in good nick, creating cash reserves to support the property in hard times, and owning your properties outright within structures that offer asset protection.

6.    Grow Your Asset Base & Achieve Cash Flow

If you’ve invested in a property that gives you more income than it takes in expenses, then you can live off the extra cash generated on the property. This passive income is generated after you’ve deducted all costs from the property like home loan repayments, taxation payments and repairs.

It is also essential to identify how much passive income you wish to live on per month. This action will help you to determine if your cash flow goals are on track and to determine how many properties you need to buy to achieve your intended cash flow. Growing your asset base and purchasing more properties over time helps you to achieve bigger and better cash flow. 

7.    Own Your Property Outright – Pay Down Your Loans

Whatever you do, you must aim to own your property outright to achieve true financial freedom. Without a home loan to pay for every month, you’ll have fewer and more manageable expenses on your property going out each month.

Some investors prefer to build up an extensive property portfolio and then as the asset base grows, they sell a couple of properties and use the profits to pay off any remaining debt on the properties that they own. This strategy is one of the fastest methods to pay off your loans and reduce the burden of debt on your portfolio.

8.    Live Off Equity

When buying property give them time to accumulate value rather than selling the properties to access quick funds. You could just as well get an equity loan against the equity that you have built up.

This loan may increase your home loan amount, but this situation is only temporary. Over time, rents will also increase and help you to pay off the loan that you took out in the first place.

The more properties you own also helps to increase the rents that you are receiving, giving you more growth in equity. If you can borrow against that increased equity, you keep your property portfolio intact and also get extra cash to live off of or renovate existing properties.

Remember, it is difficult to get equity loans if you’re out of a job, as the lender will query your lack of income to support repayments. Think carefully, therefore before you go ahead and get an equity loan.

9.    Live Off Sales Profit

The ultimate aim of purchasing property is to make a profit in the long run.

If you happen to sell this property then, you can live off the sales profit. By selling your property, you get more on top of what you originally paid, and this money can be a cash resource. A good example is the selling of properties over the years, to give you the money you need to live on or to renovate other properties that you own.

Say you sell one property and receive AU$200,000 more than you paid for it. Let’s suppose that you live off this money for the next five years. You may then sell another property after those five years have elapsed generating even more significant profits of AU$350,000, enough to live on for another six years. This strategy gives you financial freedom while keeping your property portfolio intact and ongoing. 

The cash released could be placed in a high deposit interest account generating 4 -5% interest per annum. This strategy is useful to trickle out the sales of multiple properties gradually to limit taxation, while still purchasing properties and maintaining your overall portfolio.

10.   Regularly Review Your Portfolio

One of the essential steps to financial freedom through property investment is to review your property portfolio regularly. This action allows you to adjust your investment strategy when necessary.

Property portfolio reviews should take place annually. They give you a chance to examine your investments in greater detail and ask questions like:

  • How is the property performing? Does it have positive cash flow? 
  • Was the property in line with your investment personality and financial goals?
  • Is the property likely to outperform the market averages over the next decade?
  • Is the property one that you would purchase again?
  • Is there anything that can improve the property and generate a better return on investment?

If the property has performed poorly over a three or four year period, it’s possibly a bad investment. It might require that you sell it, change its use, change the property managers, or improve its value through renovations.

Looking to Purchase Property? Learn More with Talk Investing

The Australian property market has significant opportunities for those who take them. However, it does not pay to purchase a property without due considerations; you must aim to buy investment properties that are likely to outperform market averages.

Talk Investing is a community which helps grow the knowledge of property investors in Australia, helping them to gain valueable knowledge and contribute to discussions on the best opportunities for the future.

Click here to become a member today.

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