Finding financial freedom through property

Written by in Buying

Investing in property can be a great way to find financial freedom later in life. This is why, according to the Australian Taxation Office, the proportion of investors in Australia reaches its peak for those aged between 55-64, before dropping off again after 65. Effectively investing in property can leave people with a steady source of income, while compounding capital growth in the long term to provide them with options later in life.

When starting to think about finding financial freedom through property investments, it is important to both get your head around all of the considerations of investing in property, but to understand that there is a common misconception of property investing and the build up of wealth. Investing in multiple properties to accrue wealth is not the same as diversifying your wealth. ‘Diversifying’ your investments is a term often used, but it relates to placing your money in various asset classes. Property is the one type of asset class. Investing in multiple properties means concentrating your wealth, not diversifying it, as your money held across multiple properties is susceptible to fluctuations in the one market.

With that in mind, there is diversification possible in your property types. For instance, you may look into investing interstate. Homes in Hobart continue to maintain their popularity for interstate investors due to their affordability, growth potential (some of the highest in the country) and low vacancy rates.

Switching from long-term growth

Relying on your properties as a source of income when retiring often involves a switch in your financial strategy away from one of long term growth (which has been your strategy for the past 30 years) to one which relies on a larger cash flow. Properties that attract a higher rental yield as well as low vacancy rates are good options for increasing cash flow, while avoiding the use of negative gearing in your investments will help you keep your cash flow higher.

You may not have the energy to flip properties later in life, which is why you should seek properties with short term growth potential, such as buying below market value. Flipping properties also requires a significant upfront cost (renovating without a rental income, stamp duty, other costs of buying a home). This is why timing is so important in using property investments to find financial freedom. You have years to time this right, so make sure your investing activity occurs during buyers’ markets, while providing you with enough time to pay off as much of the mortgage as possible before retiring.  

Switching your property types

Move away from energy-hungry investments (those that require you to deal with agents, maintenance, emergencies etc.) to properties with less demand on your time.

Investing in student accommodation, serviced apartments or townhouse investments can be good ways to reduce the amount of time you have to spend on the maintenance of the property, so that you can focus your energies on the big picture when it comes to your financial strategy.

Issues of liquidity

Using investments as your source of income often means having investment types that can be liquidated quickly to open up a source of cash flow. Property is certainly one of the strongest long term generators of wealth, but is famously hard to sell quickly. This is why it is important to diversify your income sources later in life after relying on long term growth in property earlier on in your career.

Your susceptibility to the market

While it is ideal to enter retirement debt-free, this is increasingly becoming a pipe dream for those Australians who have not benefited from high capital gains through property. Australia’s ageing population will have an increasing amount of people entering retirement still in debt. If you do not choose to service that debt in full with a lump sum payment from your super, you need to be aware of how changes to interest rates or the market may affect your cash flow. Investing in multiple properties or even the one extra property later in life (say, after 50) should be seen as a higher-risk strategy if you are going to face high monthly repayment rates. A safer strategy would be to downsize your property and use in capital gains to buy a smaller investment property that will provide a cash flow, while using some of that money from the sale of your home to diversify your income sources.

Seek advice

You need a solid and well-planned strategy for your retirement, which is where an accredited financial advisor will help. They can help you calculate exactly what you need come retirement, and how best to reach that destination. For instance, with a generous rental yield of 4.5%, how much money do you need in property to earn $80,000 per year? Doing the maths on this may earlier on in life will help guide you towards establishing a healthy investment base, providing you with more options later on to sell off and diversify investments.