MI system to provide lifetime income
The good news from the 2016 Census is that we’re living longer, and some futurists are predicting that people born in 2020 or later could live forever.
As exciting as this may sound, my first thought when I heard this was . . .who’s going to finance that long, long life?
From my perspective, the solution will need to include a change of thinking in relation to employment and careers. The change is already underway, in that 20 years ago it was common to get ‘a job for life’ where people would join an organisation, stay until retirement, then retire and die – as confronting as that may sound.
These days job changes, career changes and ‘work on the side’ are the norm. This has led to a rise in work independence along with work insecurity in that permanent roles can be cut in a bid to save costs or increase workforce efficiency.
Recognising that the big golden handshake will not be achievable and acknowledging the dwindling funds available for the aged pension, we are taught to ‘save for retirement’. To achieve this, the majority of Australians use super contributions as their pathway to providing for life after work.
However, after the abysmal performance of the share market and increased visibility on the fees charged to ‘manage’ super, a growing number of people are starting to think differently – not only about how to prepare for retirement, but also about work. Instead of training and working to maintain a full time job for 40 plus years, more and more people are using their initial full time employment to establish their independent income. Usually, with a view to creating an extra income stream as quickly as possible.
Recognising that it’s entirely possible to become financially independent in less than 10 years, with just a slight adjustment to our approach our ‘work’ years could just be considered as the foundation for creating lifetime income.
Personally, if I had known when I started work that this could be possible, I would have been much more motivated to learn how to find a pathway that delivered the lifestyle I needed. Instead, I thought of work as pure drudgery . . .something I had to do to earn the money I needed to go out on the weekends and spend an endless amount of money on clothes.
While we still need to have fun and spend money on things we like to buy, that slight change in thinking would have made such a difference to my focus, and I expect I wouldn’t be the only one.
Thankfully, there are endless ways to create continuous income. The one we focus on at Crave is buying and retaining property. To ensure success, there’s two key aspects we recommend :
- start with a plan – to get started read our blog ‘how many properties do you need’
- build a diverse portfolio that meets your needs.
A diverse portfolio utilises a range of strategies and property types, and has the following essential elements :
- flexibility to allow you to respond to market opportunities and changes, as well as changes to your personal situation
- balance to allow you to continue to build your portfolio through the acquisition of a property mix that matches your needs
- resilience by using carefully selected properties located in areas of opportunity, or where there are future opportunities to add value.
The key is to build a portfolio that works for each individual investor. This is important because the aim is to retain a number of properties that will be unencumbered (ie – no loans) to provide continuous income, and also provide the opportunity to continue to invest.
At Crave, we noticed most investors were limiting themselves to two key approaches – either buying for capital growth (high purchase price / negatively geared where the rental return doesn’t cover all costs) or cash flow (lower purchase price / positively geared where rents more than cover all property costs).
Critically, we found that even if investors can decide on an approach, they spend months and sometimes years trying to decide which property and area will deliver the greatest outcome. This inertia leads to missed opportunities and increased frustration, largely because the market is moving all the time. People spend hours and hours pouring over data that is usually around two months old, then by the time they make a decision, the market has moved and they miss the best choices.
To help our clients clarify their next steps, we developed the modular investing system (MI System). Note this isn’t a ‘cookie cutter’ approach. The MI System is a model or template to facilitate the development of a personalised or tailored strategy.
Using this approach, Crave clients build profitable portfolios that deliver on specific goals while making the most of market changes, and enabling continuous purchases. The aim is to start with a property type and budget level that meets your requirements, then make strategic purchases to enable you to benefit from both capital growth and positive cash flow, ensuring serviceability without major impacts on your lifestyle.
The approach includes adding projects into the mix to boost equity as well as funds, along with ensuring loans, insurance and financial buffers are structured correctly and – where relevant – the appropriate use of financial entities. All components are then considered in light of market indicators to ensure purchases are maximised.
The MI System addresses the following key elements for property success that most people miss.
- The critical first step is identifying the best property type for your current situation – or in other words . . choose the best property strategy for your situation. For example, do you need a property with multiple incomes to build your cash flow, or are you ready to action a small renovation or development to deliver profit and pay down loans?
- Ensure you have appropriate loan structures and entities – for example is it best for you to purchase in a company, trust, your own name or jointly with your partner?
- Choose the best property that meets your specific criteria – DO NOT chase the market. The market is a side issue and this is where almost everyone gets into trouble. We tell our clients all the time . . .success in property is not all about location . .it’s about strategy and that has everything to do with you as an individual. We use pure / unbiased source data – like demographics and infrastructure activity – to determine the best place to buy . . but this is always influenced by what each person needs. Put another way . . .Sydney still has lots of uplift but not for all strategies and not for every single investor. Ugh . . .it’s endlessly frustrating to see how many people get this wrong (and to know how many unscrupulous or plain inexperienced ‘advisors’ use ‘market research’ to flog bad properties to their clients).
- Ensure you use the appropriate strategy for the property you have selected. This is another key area where people go wrong. For example, don’t buy a perfectly beautiful property to renovate and overdo the work – the renovation must be consistent with the area. Just like every individual needs their own property purchasing strategy, every property has specific next phases of its life. Often people get their property activities mixed up and then have to sell the property because they think the property is ‘bad’ . . .when it’s just that the property is not maximised in the right way. Another really frustrating thing Crave is on the bandwagon to try and stop.
- Give every property a job in your portfolio and review this each year against detailed performance criteria that should include a zoning review (we review properties against 60+ data points). Each property should be in your portfolio for a reason, and this should include an indicator for whether you are going to sell or retain each property. A classic mistake we see all the time is inexperienced ‘advisors’ telling clients to sell property that should be retained, or clients sell ‘tired, old units’ because they find them annoying or unattractive – if you own one of these in Sydney and want to sell . .make sure you call me first because it will no doubt be subject to re-zoning and you can potentially turn one unit into three or more.
Clearly, property is a primary avenue for creating continuous income, but it is not as straightforward as many people think. Our goal at Crave is to provide more clarity and help our clients make good choices. Using the MI System, we match strategies with people and property to ensure portfolios are built to a level where they are self-sustaining, paying down debt and delivering lifetime income no matter how long our clients live.
Is the future here already?
With medical advances coming thick and fast, and exciting changes such as autonomous vehicles and artificial intelligence delivering outcomes we wouldn’t have considered feasible only 12 months ago . . maybe the future is here already and the majority of us will ‘live forever’. Better get busy creating that income, then you can have the choice of whether you want to ‘work forever’ or just live : – ).
Buy smarter = limitless ways to build lifetime income
Crave Property Advisory is a unique property strategy and buyers agent service. As the only independent and unbiased advisory that can help you use any property strategy Australia-wide, Crave’s services extend to home, investment and commercial property. A highly client focused organization, Crave developed the Modular Investing System (MI System) to provide clients with the ability to use a tailored mix of strategies and efficiently build profitable portfolios that create lifetime income.
Debra Beck-Mewing is the CEO of Crave Property Advisory, and has more than 20 years’ experience in property investing, Australia-wide. She has used a range of strategies to build her property portfolio including renovating, granny flats, sub-division and development. Debra is skilled in identifying development opportunities, and sourcing properties that have multiple uses and multiple exit strategies. A licensed real estate agent, Debra also holds a Bachelor of Commerce and Master of Business.
Disclaimer – This information is of a general nature only and does not constitute professional advice. We strongly recommend you seek your own professional advice in relation to your particular circumstances.
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