When looking to build wealth, the perfect property is the one that gets you into your next property faster. Cash flow properties are not the way to go, as they come with greater risk or are in locations where there is an insignificant amount of capital growth.
Incomes are important to understand when investing in property. Typically, incomes in outer suburbs of capital cities track the average or inflation, whereas incomes in inner to middle ring suburbs are above the average and growing at a higher rate.
Investors who target cash flow initially fail to look beyond the first few years and most importantly understand the end game – retirement. By planning ahead, they can increase their asset base much faster and have greater choices in retirement.
Are you considering investing in property to fund your retirement?
There are many factors to be considered here, but perhaps one of the most crucial, may not be on your radar.
In the short term, it may be your salary, your ability to borrow money, and growth that will play a role.
But as you go along, I believe it is also important to understand who will be paying your bills and ultimately, funding your retirement.
The answer of course is your tenants.
With that in mind, it is important to understand right from the beginning who the perfect tenant is.
What characteristics should you be focussing on now, to ensure you will be able to fund your retirement on your terms.
In my mind, there is a very simple approach to ensuring you get this right.
Here are my thoughts:
The Perfect Tenant
There are many factors that can define the perfect tenant and you should strongly consider their income.
More specifically, we are looking for tenants who have a higher disposable income, above and beyond the average.
They may be professionals, highly paid executives, business owners, or people with multiple streams of income,
We target a higher weekly income-earning demographic and want to ensure their incomes are above and beyond inflation and the suburb average.
Many investors make the mistake of targeting lower socioeconomic cheaper areas where properties and rents are more affordable.
Unfortunately, in these locations it is the reverse, as incomes are well below even the average and wage rises barely keep up with inflation.
With the right demographic locked in, you can then begin to focus on other important factors you must consider.
You can read here about How to Pick the Right Tenant.
The Right Property
You can make a list a mile long but when you are looking to build wealth, the perfect property is the one that gets you into your next property faster.
It is primarily about accumulating assets and then compounding and leveraging to grow your wealth faster and then live off the cash flow at the end.
Mistakenly, there is a misconception that buying properties for cash flow initially is the way to go.
But I have dispelled this myth in a previous blog.
While the thought of additional cash flow is appealing, it will not you any closer to your next property and more importantly your retirement.
These cash flow types of properties either come with greater risk or are in locations where there is an insignificant amount of capital growth or both.
While rents may have grown with inflation in these areas, the ability for higher growth and compounding is non-existent.
That is why we believe targeting the right demographics within the desired location is critical.
Why Incomes are Important
It is critical to understand the role incomes will play in property investment moving forward.
The information below is a key part of our analysis when finding the right demographic fit.
The first Suburb below is an example of an outer suburb of our capital cities that are often seen as more affordable and a target cash flow focus for investors.
Typically, incomes in these locations generally track the average or inflation without too much deviation from the median.
On the other hand, the graph below is an example of a suburb located within the inner to the middle ring of a capital city.
This is exactly what we target, with incomes not only well above the average, but also continuing to grow at a higher rate.
These people not only have the ability to continually pay more to buy property, but they also have the potential to pay more for rent.
They tend to have greater savings and as they do not live paycheck-to-paycheck, they can ride out difficult times.
With serviceability playing such a critical part with lending these days, it will be these types of tenants that will assist you to get into your next property faster.
Those who target cash flow initially, are only considering the first step of the overall investment journey.
They fail to look beyond the first few years and most importantly, understand the end game – retirement.
With the two examples provided, initially, the difference between incomes is only $133 per week.
Not a huge difference when considering that 25 years later the gap has increased tenfold to $1,374 per week.
That is an additional income of more than $70,000.
What could this difference translate to?
This additional tenant income would provide an increase in growth rent which would allow you to acquire another property much faster.
Over the longer term, you would have a larger asset base with more rental income to take control of and greater choices in retirement.
This is why initially it is so critical to have a clear and precise plan, a roadmap to your end goal.
With the Macro in place, understanding demographics and more specifically incomes will be an important consideration to achieve your goals more efficiently.
As the saying goes Failing to Plan is Planning to Fail.