The biggest mistake I see people make when they consider investing in property is that they don’t have clear financial goals.
“I want to make more money”
“I want to be rich”
even “I want to be financially free” aren’t true financial goals.
Therefore when they are looking at an investment property or even different investment strategies they find it impossible to choose the right strategies or any strategy because they don’t know what they want to achieve.
Knowing What Is Important To You Is The First Step Towards Financial Success
Knowing what is important to you is the first step towards achieving financial success.
Many people say that knowing where you are now is the first step to achieving financially success but they are wrong.
You first need to find out what is important to you.
An Important Task
Here is a task I want you to complete. Take a notepad and pen. I want you to look at your life and under each of the following 3 categories answer the following questions.
At this point let’s just put down things we would be happy to settle for, not the ultimate fantasy. Eg. Currently as a family we just have one car (A Nissian Xtrail worth $4,000). Ideally I would like 2 cars and would be very happy with a used Toyata Yaris ($8,000) and the Xtrail.
The ultimate goal would be something like a Lexus 4WD and an Aldi (total cost $200,000+) but I would be fulfilled and happy if I was financially free and only have the above said cars.
1. How much time per week do you want to spend working (assume you can work doing something you enjoy)?
2. How much time per week do you want to spend around family and friends?
3. How much time per week do you want to spend on lifestyle activities (golf, surfing, walking, TV etc?)
4. What hours of the day would you prefer to spend working?
By understanding what you want your days to look like it will help craft your idea of financial success. For me I want to work a minimum of 5 hours per day 5 days per week. I am too young and too passionate to retire.
But I would prefer to work early morning (say 6am-11am) and then have the afternoon off than I would to work in the afternoon.
1a. What lifestyle activities do you want to do on a regular basis? (eg. Golf, dancing classes etc)
1b. What is the monthly cost of these activities?
2a. What special events would you like to spend money on each year? (eg. Holidays, concerts etc)
2b. How much will these annual events cost you each year?
3a. What is your ideal rental property in the ideal location?
3b. How much does this cost per month?
4. Approximately how much do you need each month to live? (eg. Groceries, entertainment, bills etc)
I think it is important to both dream and compromise. While my ideal location to live would be a waterfront mansion in the Gold Coast which would cost over $1,500/week to rent out I am happy to compromise and would love a 4 bedroom home with a pool 15 minutes from the beach, which would only cost $400/week.
At this stage I think it is important to know your dreams but it is also important to write down where you would be comfortable and happy.
1a. How many cars do you and your family want/need?
1b. What cars would you be happy with?
1c. How much would these cars cost to buy?
1d. How much would these cars cost to run each year?
2a. What other things would you like to have? (eg. New computer, new surfboard etc)
2b. How much will these cost?
Next Step: What Income Would You Need To Achieve Those Goals
The next step is to tally up the costs of all the above – the groceries, the house, the holidays, the cars and work out an annual figure where you could achieve those things you desire.
For me $60,000/year gives us a good base solid income where we don’t long for much, but we don’t have a great deal of disposable income either. But $100,000 gives us a really good disposable income where we can spend money on luxury items of choose to save money for larger investments (like a more expensive car).
Therefore my baseline income to achieve financial freedom is $60,000/year and my reasonably attainable goal is $100,000.
Then obviously beyond that there are stretch goals, but I’m not even bothering with that yet.
Step 3: What Would You Need To Achieve That Income?
This is where we start doing some imaging of our potential investment portfolio and we start to strategise how we would achieve our goal.
Let’s say I bought a house for $150,000 in the country the achieved $300/week rent.
If this was fully paid off and I had no mortgage I would probably get about $225/week in income after expenses such as property management, council rates, insurance etc.
$225/week is $11,700/year ($225 x 52).
To achieve $60,000/year I would need 5.12 properties fully paid off. To achieve $100,000/year I would need 8.54 properties fully paid off.
This gives me a benchmark to work with and a starting place.
If I don’t go aggressive I could simply by 5 properties for $150,000 each and pay them off over time to achieve my base level of financial freedom. As positive cash flow properties they would pay themselves off.
In my next post I will talk about assessing property based on these rough financial goals we have created for ourselves.
Disclaimer: I am not a financial advisor and cannot give financial advice. This article and subsequent videos/audio is for educations purposes only.