My Property Investment Strategy: 4 Properties to Financial Freedom
When you invest in property, it’s important to have a strategy and a roadmap to achieve your long-term goals. Most of the time, the goal is to create passive income and achieve financial freedom so we can fund our dream lifestyle or have a comfortable retirement.
But there are so many different strategies we can use to make it happen.
In this article, I'm going to walk you through my favourite property investing strategy for achieving financial freedom. I personally love this strategy because it’s very hands-off and doesn’t require any risky and time-consuming renovations and developments.
For me and my family, our game plan is to build a sizable portfolio of properties, hold them for as long as possible and then start selling some of them off - and the profits we make from selling a few properties will be used to pay off the rest of the portfolio.
From there onwards, our plan is to have a portfolio of fully paid-off properties (and zero debt!), which means all of the rental income from these properties will become pure profit.
By having a few debt-free properties that are earning a weekly rental income between $500 - $1,000 per week - we should be able to live comfortably off this income without needing to work for money. This is my definition of financial freedom.
A three-phase plan to achieve financial freedom
I break down my strategy into three phases, with each part of the plan involving different actions to achieve the end result:
Accumulate - purchasing the right properties
Consolidate - Saving and increasing liquidity
Liberate - Gradually selling some properties and paying off debt
I’ll go into all of these in more detail. But first, let’s put a case study into a bit of context so you can see how this strategy might work for you.
Foundations
Firstly, it’s important to remember that property investing is a long-term game, NOT a “get rich quick” scheme! When it comes to building wealth, there are no shortcuts.
It’s also important to assess what our long-term goals are. A good place to start is to ask ourselves:
What is my passive income goal?
When do I want to achieve this?
When do I plan to retire?
Knowing the answers to these questions will help set the foundations of your unique strategy and influence the finer details of how many properties you need to buy, what type of properties they need to be, and how long you need to hold them for.
Assumptions
To make it easier for us to walk through this strategy, let’s make some assumptions to create a hypothetical case study.
Goals:
We want to retire 15 years after buying our first investment property
Our passive income goal is $100,000 per year.
Other assumptions:
We will contribute a 20% deposit to each property purchase and make interest-only repayments
The value of each property will grow by 7% each year (the historical growth rate)
The rental yield of each property will be 5%
Phase 1: Accumulate (5 years)
This initial phase is about purchasing investment-grade properties in suburbs that are likely to grow in both the short term and the long term. We want to buy properties in good suburbs that we can hold onto for at least 10 years. But we also want properties that are likely to experience short-term growth because this increase in value will help us to unlock equity to purchase more properties for our portfolio. When the value of our first property increases, we can use that equity to buy property number two, and when that one grows we can do the same thing for properties three, four, and so on.
Of course, long-term growth is crucial because it will bring down our LVR (loan-to-value ratio), devalue our debt, and reward us with the option to sell them in the future at a significant profit. That profit will be used to pay off other properties in our portfolio.
For example, if we purchased four investment properties over the first phase of five years (each property worth $500,000), at the end of the five years we would have a portfolio worth $2.26 million because the properties we bought early on have since increased in value.
Phase 2: Consolidate (10 years)
Once we’re done with accumulating properties, it’s time to move on to the second phase. During this phase, our main focus is to save as much money as possible, increase liquidity, and let the balance of our debt be eroded by inflation.
However, at the same time, the overall value of our portfolio will also be increasing with compound growth (one of the benefits of inflation!)
If we make some smart purchases, and if each of our properties grows by 7% each year, as per the historical average, the value of our portfolio would grow like this:
From $2.3 million to $2.4 million in year 6
From $2.4 million to $2.6 million in year 7
From $2.6 million to $3.2 million in year 10
From $3.2 million to $3.6 million in year 12
If we assume we’ll be making “interest-only” repayments on the loans, then the amount of debt will remain the same.
Why is this important?
You see, as the value of our portfolio continues to grow, the Loan to value ratio (LVR) starts to go down. This means your debt is being devalued over time, which is one of the few advantages of inflation.
This means we still own the same properties, which have increased in value, but we still have the same amount of debt.
The longer you hold on to these properties, the higher their value will be when we are ready to sell some of them down to pay the others off.
During the “consolidate” phase, it’s wise to aggressively save your money so you can reinvest any spare cash savings your offset accounts linked to your loans. Let’s say we were able to save $3,000 per month for 12 years. That would add up to $432,000 in cash savings. This amount of cash is enough to pay off one of your properties’ debts of $400,000. If this money was sitting in an offset account, the interest repayments would be almost nothing because the entire loan has been “offset” by our hard-earned savings.
Phase 3: Liberate (1-5) years
Finally! After all those years of diligently saving money, paying off our loans, and watching our properties increase in value, it’s time to “liberate” ourselves by selling down some of the properties. With the profit from the sales, we’ll pay off the debts for these properties, which means we can now own them outright, be debt free and live off the rental income.
By years 12 or 13, our property portfolio could be worth roughly $3.6 to 3.9 million. And if we only made interest-only repayments, our debt would have a remaining balance of $1.8 million.
When we get to this point, our portfolio would have grown significantly, and we could gradually start to sell properties, using the profits from those sales to pay off all the other debts.
For example, imagine we owned several properties with the previously mentioned loan balance of $1.8 million. We sell two properties and use the profits to pay off the other two in our portfolio. - We will then own two properties outright.
Assuming a rental yield of 5%, the two properties we own will be earning a passive income of $103,000 annually, which means we’ve met and exceeded your passive income goal of $100,000 per year.
Here’s where it gets better…
If we were able to aggressively save enough money to offset one or two properties, we might not need to sell two (or any) of our properties to receive the same benefit.
If we had enough cash savings to offset all of our debts, we could pay little or no interest while continuing to hold our properties. What this means is we’ve essentially paid off a property or two via our offset account.
Ideally, this is a better way to reach our goals because we get to hold on to another asset that will continue to grow and produce more income, and we don’t have to pay capital gains tax from selling it.
Please note: This case study is purely an example to illustrate how my property investment strategy works. Naturally, there are other real-world costs that need to be considered when calculating your profits. In addition to the capital gains taxes referenced above, you have other expenses such as agent fees, solicitors fees, property taxes, and ongoing maintenance costs.
How can we make this happen sooner?
Everyone is different. Only you know your unique risk appetite. If you’re willing to be more aggressive, you might consider buying properties with more potential to add value and income. This can include subdivisions, renovations, or adding a granny flat. Making these changes will not only add value to your portfolio — they’ll produce extra income as well.
Depending on your financial situation, you may consider making both principal and interest repayments on one of your properties. This would allow you to start paying off some of your debts early, during the “consolidate” phase.
Also, depending on your goals you could consider building a bigger portfolio so you could have more assets compounding in value over time.
This strategy requires patience, perseverance, and goal setting, but it’s a simple and elegant way to create an annual passive income of $100,000 over time with just four properties.
So, what’s your passive income goal? And when do you want to achieve it?
Do the maths and figure out how many properties you need to get there!