Good day, it’s Ben Everingham here from Pumped On Property and in today’s video we’re going to talk about how can property investing can make you financially free.
Good day, it’s Ben Everingham here from Pumped On Property. I think my voice just broke a little bit there. I’m sure, as always, my wife will edit that out for me and today we’re going to talk about how property investing can make you financially free. The video is going to be broken into three major parts. The first part is going to be what does it actually mean to be financially free. The second part will be why I think it’s important to be financially free. And the third part will look at five different ways of actually creating financial independence or becoming financially free through property investing.
The first thing I wanted to talk about is what does it actually mean to be financially free because so many people have such different ideas around what financial independence or being financially free actually means but for me, financially free means you can never get out of bed again or go to work again in your life, although how bloody boring would life be if you’re not working or contributing or doing something positive and actually getting up everyday, but not getting out of bed and the money still comes in.
I talk to investors all the time that have passive income coming in through their property portfolio based on a certain amount of debt and a certain amount of rental income, and that’s all well and good but if people stop renting that property, if the world falls on its head, if rental units drop dramatically, if interest rates rise, then all of the sudden we can have an issue with our cash flow.
The type of cash flow that I’m talking about is the type of cash flow where regardless of what’s happening externally, it continues to come in and for me the only way to really receive that is to own an asset completely outright. Let’s say you own a $400,000 property that rents for $400 per week and rents for 50 weeks of the year, therefore give you $20,000 per year in income, minus 20% in expenses, so you’re kind of ending up with about $16,000 from that property per year before tax in your pocket.
Let’s say that you wanted to earn $80,000 a year, you might need to own four or five of those types of properties completely debt free to achieve what you’re looking for. If that sounds overwhelming to you at the moment, don’t worry, I’m sure it won’t by the end of today’s video because if I looked back at myself and thought four years ago, five years ago, I could potentially own four or five of those types of properties completely outright with that cash flow, without knowing what I now know, I would’ve thought it was impossible or something that you had to be lucky to do or something that someone in your family had to leave you a ridiculous amount of money to be able to go and do, but these days, as I’ve learnt more, it becomes much, much easier for the average person to go out there and do this.
The why question, which is the second part of today’s video should be simple and if it’s not simple for you then I’m definitely the wrong person to be listening to/having a talk to in the future, but for me, the why is really simple. It’s about spending more time with my family and the people that I care about because relationships are at the centre for me, so being financially independent really just gives me more time to spend with the people that I love and to have an impact on their lives in a positive way.
Another why for me, which is why I run Pumped On Property, is contribution, so helping other people that are in different stages of their life get the knowledge, skills, and tools to actually do what they want to do. Another thing for me health, which has became a much bigger priority this year than it has been in the last five years. I kind of let my health go a little bit so for me, health in 2017 at the time of recording this video has become a big priority and that means a couple of sessions of yoga per week in front of YouTube on the telly with the kids.
I go to pilates a couple of days a week. I’ve got some amazing people around me that are right into their callisthenics and weight training, so I go and do that a couple of days a week, and then just doing fun stuff, like skating and surfing and being active in as many ways as possible. To me, health is a really big part of my why. And the other things that are important to me is travel and experiences and adventure, so being able to say yes to the things that I want to do when I would like to do them is a big driver for financial independence for me and a big part of the story that I’m trying to work towards for my own life so that I can go out there and explore all of those amazing places that we’re supposed to go and see at some time in our life.
If you don’t understand what your why is today, that’s completely cool. It’s taken me a long time to realise what’s really important to me as opposed to what I thought was important to me because back in the old days when I was just getting started, I thought it’d be so good to have a million dollars or ten millions dollars in a bank account or this business or that business or this property empire and those properties in my portfolio, but all of that stuff I’ve realised, the nice cars and nice houses, it’s just driven and fuelled by an ego.
At some stage in our life, we’ve all got to have nice stuff and we’ve got to be able to do the things that we want to do. If you’re more into that stuff, that’s completely cool, like everybody should be able to explore whatever their why is but for me, having experienced some of those things in the last three years has made me come closer back to my real self, which is a person that just wants to connect, help people, look after myself and my family, and do really good work in a way that’s going to leave a meaningful impact on the world.
Whatever your why is, I really think it’s important to sit down and go, “Where do I want my life to be 12 months from today? Where do I want my life to be 10, 15, 20 years from today?” That can be confronting and it can be a really difficult question and it’s okay as you progress through the journey to change that as well because the things that drive me today are the things that more drove me when I was younger, as opposed to the 20s that I went through where I was chasing a lot of other people’s dreams because I thought that was what you were supposed to do and that’s what society and everyone around me had always said.
Finding that why is very important. In terms of the how, which is the third thing I wanted to talk about and they’re the five different ways that I think it’s easily … Not easily, I don’t want to make this sound like it’s easy to achieve, but these are the things that if you put in focus, hard work, and build the right knowledge and skills, can be possible for an average person or couple earning $100,000 per year combined to achieve over a 10, 15, 20 year period.
Again, you’ve seen enough of my videos hopefully to know that it’s not about getting rich quickly at Pumped On Property, it’s about setting a plan in place and strategically actually working on that plan over a period of time until you achieve what you want to achieve. There’s plenty of other sprucers in the market talking about get rich quick, and I’m sure you can find their stuff everywhere right now.
The first strategy, which is the one that I personally resonate most with, and that’s because I’ve talked to a lot of investors and I’ve seen it as the strategy that requires the least amount of risk, which can help you get there in the shortest period of time because obviously, if you’re talking about owning a couple million dollars worth of property outright to get your passive income of $100,000 per year for example, it can be really daunting to think about paying $2 million dollars worth of debt outright using your own savings and your own income.
This first strategy is really about buying high quality property, holding that property for a period of time, and then selling some of that property to repay some of the remaining debt on the other properties completely outright. An example of this might be to go out and to buy four properties over a five year period, worth $500,000 each, and let’s say that two of these properties are normal houses and you buy them for $500,000 and they rent for $500 a week in quality locations like Brisbane CBD, for example, at the time of recording this movie.
Again, if you’re watching this in a bunch of year’s time then Brisbane property won’t be relevant and there will be other marketplaces that are presenting better options, but you buy these two $500,000 properties that rent for $500 per week, and then you go and buy two more properties. Let’s say they’re $400,000 homes and for $100,000, you’d be able to own another granny flat. Let’s say the home rents for $400 a week and the granny flat rents for another $300, there’s two properties there worth $500,000 that now rent for $700 per week.
What you do is once you’ve bought all of those properties, you pay off some of the debt and you reduce your risk position over time and let’s say that from the first five years you’ve now bought these properties. Again, that might feel too easy for some people in today’s video and impossible for others, but it’s just about learning more and growing and evolving over time. Let’s say that you are able to make that happen over the next five years and then from there, your only task is to pay down debt and to hold those properties for the next 10 years.
This is a 15-year strategy and basically at the end of that 15 years, you sell the first and the second property, which you bought for $500,000, which if they’ve grown by 5% per year compounded for 15 years, are probably worth about $1 million dollars each and then you sell those two properties and yeah, you’re going to pay a heap of tax, but welcome to the world of making money in Australia unfortunately or fortunately, because you’ve got such a great life and services that look after us.
You use the profit from selling those two properties to pay off the other two properties outright. Remember I said that they were renting for $700 per week at the start of year … Or at the end of year five because the house and the granny flat. Well, at the end of year 15, they should hopefully be renting for about $1,000 per week and so you’ve got two properties that you own completely outright from selling the first two properties you bought, plus paying off some debt over a 10 year period, and then you’ve got your $100,000 per year that you can live off and spend the rest of your life living it the way that you want to lead.
Fifteen years sounds like a long time, but if you’re 30 or 40 or 50, think about how quickly the last 15 years has gone. Most of the hard work is going to be done in the first five years, so you may as well just get on with it, try to plan to make it happen, and get stuck into it. The second way to become financially free from my perspective is again, a strategy that a lot of Australians use and that is literally just to buy and hold property for the long term.
That’s going to take more than ten to 15 years unless you’re lucky enough to sort of time Sydney and Melbourne very, very well but the reality with that strategy is it’s a bit of the grind, it’s a bit of the hold up … A bit of the hold. A bit of the old hard way where you simply buy property and a number of quality properties, and over the time of your lifetime you repay the debt and the rent increases and then at some point in the future, you are getting enough passive income to have replaced your income and to be living comfortably.
The problem with that strategy for me is that capital growth doesn’t always occur the way that it used to in the past in Australia and rental returns as people’s incomes haven’t been increasing much lately. Don’t always head in the direction that you want them to, so again, I don’t like someone else being controlled … If the property market reduces in value, if the rental market reduces in value, if a developer comes in with a big project and all of a sudden throws out your cash flow position because of over supply, I don’t like to be betting my future on time. Especially financial independence over 25 to 30 years. It just feels like a long time to be waiting around and hoping.
The third one is to live off the capital growth, which I’m going to brush over these last three a bit quicker. It’s effectively buying and accumulating a number of high quality properties and let’s say that you’ve accumulated those four properties from before and you’ve got about $2 million dollars worth of property sitting in the bank … Let’s say that property goes up in value by 5% per year, so 5% on $2 million dollars if $100k per annum and you go back to the bank and say, “Hey, my portfolio has gone up by 5% in the last 12 months. I’ve clearly got $100,000 here, I would like to take out fifth year or $80,000 of that to live off.”
This is a strategy where I can’t cover all of this stuff in today’s video because I don’t have enough time and it’s a bit more complicated but in the past, this is the way that 50-80% of Australians actually lived off property because capital growth was so consistent over time. It is a strategy that a lot of people at retirement ages currently employ. It’s definitely one worth Googling and having a little bit more of a look around, like how to live off the equity from investment properties might be a good way to search it.
Again, it’s just a different way of looking at the same thing. Again, for me, I’m the guy that likes to own the assets outright and getting the passive income for life, but again, this could be one way for certain people to do it if it’s something that resonates with you after you talk to your accountant, solicitor, and learn more about it.
The fourth way is to live off the cash flow, so let’s say for example you own a couple million dollars worth of property and you’re getting very, very strong rental return on that property. Meaning the rent covers the costs of the interest on the property, as well as all of the holding costs of that property, and you’re still left with a surplus at the end of each week or each month.
Again, this is another very common way that investors live off their property portfolios. For me, it could be a strategy that has worked for a lot of other people in the past. Again, problems being in the future or the cons associated with this strategy is interest rates improve or increase, not improve. Depends how you look at it. Increase. The rental return from the property comes down because the holding costs go up and all of a sudden that $1,000 or $2,000 a week in passive income that you were saving from your portfolio dwindles away to a point where you might not be able to live off enough or live off the difference.
Again, it’s a strategy that works at certain times of the market but not all the time, and again, it’s not a forever strategy because there’s so many variables in the property market, but it has been a strategy that a lot of people put in place before and obviously, it’s had success for those people as well. The fifth and final thing I wanted to touch on today is development, which is a whole video or ten videos or 20 or 100 videos in itself, but effectively there’s two ways to live off the income associated with development.
That’s one, to do a really good deal once every 12 months or couple of years to give you the income that you need to enjoy the lifestyle that you want through making big chunks of cash. That’s more of an active strategy but obviously, you’re not going to be working anywhere near as much as you currently have to 38 to 50 hours per week. The second development strategy is more let’s say you were to do a four pack of townhouses or a four pack of houses or even a split of block or something simple like a little triplex.
The strategy there being to develop or to create a little project where you can sell off half if it’s a split of block or you can sell off three if it’s a townhouse and keep one. Whichever asset you end up keeping, obviously, the profit from what you’re selling repays a significant amount of that debt so that can be a strategy for certain people that understand development, that understand how to make money and the advantages of sometimes not making a full profit on a deal.
The second part of the development option is really creating a product and then selling part of that product or project to repay all of the debt or most of the debt on whatever you decide to hold. Let’s say you go for your standard split a block where you effectively buy one house, remove the house or slide the house over to the other block, and then build on the remaining lot, or if you’ve knocked down a house, build on both lots. This strategy is used all over Australia.
Obviously, the rules in each town plan change dramatically but if you’re looking into that sort of thing, you can get your head around it and maybe you sell one side and use the profit from that to pay down a significant chunk of debt on whatever you decide to hold. Or let’s say that decide you’d like to build four townhouses and effectively you create the three of them and pay off the remaining debt completely outright on the remaining townhouse, and that is a way to create good chunks of equity that you can redraw from, as well as good chunks of passive cash flow.
Because let’s say that the townhouse that you keep is worth $300,000 and it rents for $400 per week and you own it outright. That’s $20,000 per year, minus the costs associated with that asset. You might do five of those projects over a ten year period and all of a sudden you’ve created a $100,000 per annum in income.
I hope today’s videos have been helpful. I know we’ve talked about a lot. Just to recap really quickly, we talked about what being financially free or financially independent is from my perspective, which is purely passive income. We talked about why it’s important and you’ve got to go out there and find your own why. And we talked about the five different options, so the buy, hold, and sell. The buy and hold, we talked about to live off the passive income. We talked about to live off the capital growth. Sorry, I’m just looking through my screen there to remind myself. And we also talked about the development options.
I hope you’ve got some value of today’s video. I run a buyer’s agency called Pumped On Property and I’d love the opportunity to do a one on one strategy session with you where we sit down and look at where you are right now and create a little bit of a high level plan for the future, as well as identify your next step. To do that, please jump over to www.PumpedOnProperty.com and click on free strategy session at the navigation bar. I hope you’ve liked this video. Love to hear your comments below and any other ideas that you have for achieving financial independence through property.
Until next time, timing is everything. Thank you.